Business, Operations and
Supply Chain Strategy
(BOSCS)
Supply Chain Strategy:
Introduction to Supply Chain
Strategy
Teaching schedule, topics 7-12
Topic
Lecture
7
Introduction to supply chain strategy
8
Determining organisational boundaries:
vertical integration and outsourcing
9
Drivers of supply chain performance
10
Dynamics of vertical supply networks:
demand fluctuations and the bullwhip effect
11
International issues in supply chain strategy
12
Risk management in supply networks;
including the design and management of sustainable supply
chains
Required reading for this lecture
• Required reading for this lecture on
supply chain strategy:
• Chartered Institute of Purchasing and
Supply (2009), Coursebook for the Unit on
Strategic Supply Chain Management , 2nd
edition,
chapters 10, 11, 13
The boundaries of
the business organisation
• There are two possible perspectives on
the boundaries of the (business)
organisation:
• external perspective: the supply chain
• internal perspective: the value chain
External perspective:
the supply chain
• The supply chain consists of all the stages of
production
– widely defined; that is, including manufacture,
supply, transport and service –
that are involved, directly or indirectly, in
fulfilling customer orders for a particular
product or range of products.
Simple diagram of the supply chain
production of
raw materials
by raw material
producers
storage of
raw materials
at factory 1
storage of
raw materials
by raw material
producers
transportation
of raw materials
to factory 1
fabrication
of raw materials
into components
storage of
components
at factory 2
storage of
components
at factory 1
transportation
of components
from factory 1
to factory 2
assembly of
components into
finished goods
C
storage of
finished goods
at factory 2
transportation
of finished
goods to
Distribution
Centres
storage of
finished goods
at Distribution
Centres
Transportation of
finished goods
from
Distribution Centres
to retailers
storage of
finished goods
at retailers
transportation
consumption of
of finished
finished goods
goods from
by final customers
retailers
to final customers
Supply ‘chain’ versus ‘network’
• At any stage of the supply chain, more than
one actor (or ‘player’) may be involved.
• In other words, there may be multiple
suppliers, manufacturers and/or distributors.
• Therefore, it may be more accurate to use
the term ‘Supply Network’.
The potential complexity
of a supply network
storage of
materials
using materials to
produce finished goods
storage of
materials
transportation
of materials
storage of
materials
storage of
finished goods
Design features of a supply network
• The key design features of a supply network:
• task design
• workflow design
• organisational design
• coordination (planning & control)
• motivation
• The crucial problem in a supply network is that no
firm is necessarily in overall control of its design.
Unless there is a dominant focal firm who can pull
the network together, each actor may end up
making its own decisions, which will not necessary
be consistent with those of the other actors.
Supply Chain Management
• Supply Chain Management is concerned with
the management of two or more (or, ideally,
all) successive stages of a Supply Chain (or
Network).
• Supply Chain Management is made much
more difficult by:
• Uncertainty in demand: information is needed
on (changes in) the demand for resources
• Uncertainty in supply: information is needed on
(changes in) the availability of resources
Maximising Added Value
• From a ‘systems’ perspective, the overriding
goal should be to maximise the added value
created by the supply network as a whole:
AV = B – C = (B – P) + (P – C)
• But each actor or player in the network will, in
practice, try to maximise its own share of this
added value.
• This is not necessarily a ‘zero-sum’ game,
but could lead to a decrease in the overall
amount of added value.
Key decision phases in SCM
• Strategic (design) phase
• Strategic decisions relate to the configuration of the supply
chain. They have a long-term impact, lasting years.
• Planning phase
• Planning decisions cover a period of three months, say, to
a year. They include decisions such as aggregate (or
production) planning and product promotions over that
period.
• Operational phase
• Operational decisions span days or weeks. They include
the sequencing of production and the filling of specific
customer orders.
Different views of
supply chain processes (1)
1. Cycle view
• A ‘Cycle’ view of a supply chain divides
processes into cycles, each performed at
the interface between two successive
stages of a supply chain.
• Each cycle starts with an order placed by
one stage of the supply chain and ends
when the order is received from the
supplier stage.
Cycle view
Customer
Customer
order cycle
Retailer
Replenishment
cycle
Distributor
Manufacturing
cycle
Manufacturer
Procurement
cycle
Supplier
Different views of
supply chain processes (2)
2. Push/Pull view (location of the CODP)
• A ‘Push/Pull’ view of a supply chain
characterises processes based on their
timing relative to that of a customer order.
• The ‘Customer Order Decoupling Point’
(CODP) indicates that storage point in the
supply chain, ‘upstream’ from which the
planning and control of production
activities is decoupled from the actual flow
of customer orders.
The push/pull boundary
• Processes upstream from the CODP are ‘push’
processes. They are planned and controlled on the
basis of prior forecasts of customer orders.
• Processes downstream from the CODP are ‘pull’
processes. They are performed in response to
actual customer orders.
• That is, the CODP constitutes the ‘push/pull
boundary’ in the supply chain.
• The precise location of the CODP defines the basic
structure of the supply chain, and thereby also the
basic strategy for SCM.
Strategic policies for
supply chain planning and control
• Engineer To Order (ETO)
• no CODP exists in the supply chain
• Make To Order (MTO)
• CODP is located at the point where raw materials are
stored
• Assemble To Order (ATO)
• CODP is located at the point where components are
stored
• Make To Stock (MTS)
• CODP is located at the point where finished goods are
stored
Engineer To Order
production of
raw materials
by raw
material
producers
storage of
raw materials
by raw
material
producers
transportation
of raw
materials
to factory 1
• Advantages:
• Zero cost of holding
inventory
• High flexibility
• Quality of design can
be high
storage of
raw
materials
at factory 1
fabrication
of raw
materials
into
components
storage of
components
at factory 2
storage of
components
at factory 1
transportation
of
components
from factory 1
to factory 2
assembly of
components
into
finished goods
• Disadvantages:
• Delivery is very slow
• Delivery may not be
dependable
C
storage of
finished
goods
at factory 2
transportation
of finished
goods to
Distribution
Centres
storage of
finished
goods
at
Distribution
Centres
transportation
of finished
goods from
Distribution
Centres
to retailers
storage of transportation consumption of
finished
of finished
finished goods
goods
goods from
by final
at retailers
retailers
customers
to final
customers
Make To Order
production of
raw materials
by raw
material
producers
storage of
raw materials
by raw
material
producers
transportation
of raw materials
to factory 1
• Advantages:
• Low cost of holding
inventory
• High flexibility
• Quality of design can
be high
storage of
raw
materials
at factory 1
fabrication
of raw
materials
into
components
storage of
components
at factory 2
storage of
components
at factory 1
transportation
of components
from factory 1
to factory 2
assembly of
components
into
finished goods
• Disadvantages:
• Delivery is relatively
slow
• Delivery may not be
dependable
C
storage of
finished
goods
at factory 2
transportation
of finished
goods to
Distribution
Centres
storage of
finished
goods
at
Distribution
Centres
transportation
of finished
goods from
Distribution
Centres
to retailers
storage of transportation consumption of
finished
of finished
finished goods
goods
goods from
by final
at retailers
retailers
customers
to final
customers
Assemble To Order
production of
raw materials
by raw
material
producers
storage of
raw materials
by raw
material
producers
transportation
of raw materials
to factory 1
storage of
raw
materials
at factory 1
fabrication
of raw
materials
into
components
storage of
components
at factory 2
storage of
components
at factory 1
transportation
of components
from factory 1
to factory 2
• Advantages / disadvantages:
• Medium cost of holding
inventory
• Medium flexibility
• Quality of design can still
be quite high
• Delivery is relatively fast
• Delivery is relatively
dependable
assembly of
components
into
finished goods
C
storage of
finished
goods
at factory 2
transportation
of finished
goods to
Distribution
Centres
storage of
finished
goods
at
Distribution
Centres
transportation
of finished
goods from
Distribution
Centres
to retailers
storage of transportation consumption of
finished
of finished
finished goods
goods
goods from
by final
at retailers
retailers
customers
to final
customers
Make To Stock
production of
raw materials
by raw
material
producers
storage of
raw materials
by raw
material
producers
transportation
of raw materials
to factory 1
• Advantages:
• Fast delivery
• Dependable delivery
• Efficient production
storage of
raw
materials
at factory 1
fabrication
of raw
materials
into
components
storage of
components
at factory 2
storage of
components
at factory 1
transportation
of components
from factory 1
to factory 2
assembly of
components
into
finished goods
• Disadvantages:
• High cost of holding
inventory
• Low flexibility
• Standard quality of
design
C
storage of
finished
goods
at factory 2
transportation
of finished
goods to
Distribution
Centres
storage of
finished
goods
at
Distribution
Centres
transportation
of finished
goods from
Distribution
Centres
to retailers
storage of transportation consumption of
finished
of finished
finished goods
goods
goods from
by final
at retailers
retailers
customers
to final
customers
Key criteria for choosing
between SCM policies
• The key criteria upon which the choice
between these different strategic
policies for SCM must be based are:
• Feasibility
• Desirability
Feasibility
• The feasibility of a particular SCM strategic
policy relates to the nature, uncertainty and
unpredictability of the external environment :
• Customer demand may be fundamentally
unforecastable; or any demand forecasts may
be subject to significant errors.
• The supply of raw materials and/or
components may be unreliable because of poor
conformance quality or a low level of
dependability on the part of the vendors.
Desirability
• Even if a particular strategy is feasible, it may
not be desirable , depending on its:
• acceptability , in terms of its financial return;
• vulnerability , in terms of the risks involved (of
demand forecasts being wrong or vendors not
delivering on time)
• ‘strategic fit’ with business and operations strategy;
that is, how well it supports the priorities put
on specific performance objectives.
• In relation to the last point, it should be noted that
selecting one particular strategy in preference to
another implies important trade-offs between the
various performance objectives in SCM.
Strategic performance objectives
in supply chain management
Strategic performance objectives in SCM
Customer service
(‘responsiveness’)
Resource utilisation
(‘efficiency’)
Quality:
quality of design
quality of conformance
Speed (of delivery)
Dependability (of delivery)
Flexibility:
product flexibility, innovation,
customisation, range; volume
flexibility; delivery flexibility
Selling price
Cost of production
Achieving strategic fit between
the competitive priorities for the supply chain
and the capabilities of the supply chain
Industry &
market
environment
Competitive
priorities for
supply chains
Business
strategy
Competitive
advantage
based on
supply chains
Supply chain
strategy
Distinctive
capabilities
of supply
chains
Supply chain
activities
Supply
chain
processes
Endowments
of tangible &
intangible
resources
Resources
committed to
supply chains
Business
performance
How is strategic fit achieved?
• The business must understand its customer needs and
competitors’ actions ; including the role of demand
uncertainty.
• The business must understand its supply chain capabilities
(in terms of its responsiveness and efficiency); including the
role of supply uncertainty:
• a CODP that is located upstream fits better with competitive
priorities based on flexibility and quality of design ;
• a CODP that is located downstream fits better with
competitive priorities based on fast and dependable delivery
and efficiency .
• The business must achieve an appropriate balance between
flexibility and efficiency, taking account of the levels of
demand and supply uncertainty.
Potential obstacles
to achieving strategic fit
• Increasing variety of products
• Decreasing product life cycles
• Increasingly demanding customers
• Fragmentation of Supply Chain ownership
• Vertical dis-integration of production activities
• Outsourcing of non-production / support
activities
• Globalisation
• Globalised supply chains
• Increasing global competition
Your task
• Use the Internet and/or other information
sources to investigate three examples of
effective supply chain management.
• For example:
•
•
•
•
•
Computer manufacturers (Dell)
Supermarkets (Tesco)
Car manufacturers (Toyota)
Consumer products (Procter & Gamble)
Mobile phone manufacturers (Apple)