Slide 5.1
Chapter 5
Purchasing and supply strategy
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.2
Purchasing and supply strategy
Resource usage
Performance objectives
Speed
Dependability
Flexibility
Cost
Capacity
strategy
Supply networks
Market competitiveness
Issues include:
• What is purchasing and supply
strategy?
•What should we do and what
should we buy?
•How do we buy; what is the role
of contracts and/or relationships?
•How do we manage supply
dynamics?
•How do we manage suppliers
over time?
•How do we manage supply
chain risks?
Quality
Process Development
and
technology
organisation
Decision areas
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.3
Supply networks are the interconnections of relationships
between operations
Flow of products/services
Flow of information
Focal
level
Upstream
Second-tier
suppliers
First-tier
suppliers
Downstream
First-tier
customers
Second-tier
customers
Company A
Company B
Company C
x
x
x
x
x
Supply side of the network
Demand side of the network
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.4
Operations performance should be seen as a whole supply chain
issue
Benefits of looking at the whole supply chain include
Puts the operation into its competitive context
Helps to identify the key players
Shifts emphasis to the long term
Sensitises the operation to macro changes
Changes the nature of the ‘supplier-buyer’ relationship
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.5
The value net (based on Brandenburger and Nalebuff)
Competitors
The focal company
Suppliers
Operations
Resources
Market
Requirements
Customers
Complementors
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.6
Close
– Few suppliers
Transactional –
Many suppliers
Type of inter-firm contact
Types of supply arrangement
Long-term
virtual operation
Vertical
integration
‘Partnership’
supply
relationships
Virtual spot
trading
Traditional market
supply (based on
contractual
arrangements)
Resource scope
Do nothing
Do everything
The character of internal operations activity
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.7
Vertical integration decisions
Exclusive balance
between stages
Non-exclusive balance
between stages
Backward
integration
Forward
integration
Focal
operation
Extent of integration
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.8
The decision logic of outsourcing
Is company’s
Does
Is activity
operations
company have
of strategic
importance No specialised
No performance
superior?
knowledge?
?
Yes
Yes
Yes
Is significant
operations
performance
No improvement
likely?
Explore
outsourcing
No
of this activity
Yes
Explore keeping this activity in-house
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.9
Not critical
Contribution to
Competitive
advantage
Critical
Generic sourcing strategies
Invest to perform internally
(if high potential for
opportunism)
Perform internally to develop
(if high potential for
opportunism)
Outsource
(if possible to mitigate risk of
opportunism)
Outsource
(if possible to mitigate risk of
opportunism)
Outsource
(if possible to mitigate risk of
opportunism)
Weaker
Outsource
(if possible to mitigate risk of
opportunism)
Keep internal
(if lack of capable suppliers and
spin-off not feasible)
Relative capability
position
Stronger
Source: Adapted from Mclvor, R. (2008) what is the right outsourcing strategy for your process?, European
Management Journal, 26, pp. 24-34.
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.10
Partnership relationships
Partnership relationships are seen as
desirable because they can reduce
the transaction costs of doing
business
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.11
Elements of process partnership relationships
Attitudes
Trust
Sharing
success
Long-term
expectations
Multiple
points of
contact
Joint
learning
Closeness of
relationship
Joint coordination of
activities
Few
relationships
Information
transparency
Joint problem
solving
Dedicated
assets
Actions
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.12
Partnership relationships
There are strong forces acting against the
maintenance of trust
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.13
The ‘prisoner’s dilemma’ decision
Mr.
Orange
Confesses
Confesses
Doesn’t confess
Mr. White gets 5 yrs
Mr. White goes free
Mr. Orange gets 5 yrs
Mr. Orange gets 10 yrs
Mr. White gets 10 yrs
Mr. White gets 3 yrs
Mr. Orange goes free
Mr. Orange gets 3 yrs
Mr. White
Doesn’t confess
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.14
The ‘prisoner’s dilemma’ decision
Assume Mr. Orange confesses
Mr.
Orange
Confesses
Confesses
Doesn’t confess
Mr. White gets 5 yrs
Mr. White goes free
Mr. Orange gets 5 yrs
Mr. Orange gets 10 yrs
Mr. White gets 10 yrs
Mr. White gets 3 yrs
Mr. Orange goes free
Mr. Orange gets 3 yrs
Mr. White
Doesn’t confess
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.15
The ‘prisoner’s dilemma’ decision
Assume Mr. Orange doesn’t confess
Mr.
Orange
Confesses
Confesses
Doesn’t confess
Mr. White gets 5 yrs
Mr. White goes free
Mr. Orange gets 5 yrs
Mr. Orange gets 10 yrs
Mr. White gets 10 yrs
Mr. White gets 3 yrs
Mr. Orange goes free
Mr. Orange gets 3 yrs
Mr. White
Doesn’t confess
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.16
Degrees of trust
Cognitive
trust
Bonding
trust
…trusting you is likely to
give me more benefits
than not trusting you...
Based on
knowledge
Cumulative positive
experiences
Calculative
trust
…I believe I can trust you
because I think I know
you enough to be
confident you will behave
as I would wish...
…I trust you because I
know that you know that I
wouldn’t let you down and
you know that I know that
you wouldn’t either…
Based on
feelings
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.17
Some factors influencing the nature of network relationships
Economies of
scale
Market
position
Transaction
costs
Market
risks
Operations
resources
Nature of
network
relationship
Market
requirements
Market
structure
Learning
potential
Resource
deficiencies
Competitive
behaviour
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.18
Supply arrangements are a balance between contracting and
relationship
‘Transactional’ or ‘marketbased’ supply arrangements
‘Partnership’ supply
arrangements
Emphasis predominantly
on relationships
Emphasis predominantly
on contracting
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.19
Supply Chain Dynamics
‘Hard’ supply dynamics
Look for the causes of overreaction to
volume changes
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.20
Note – All operations keep one period’s inventory
Third-tier
supplier
Prodn.
1
2
100
20
3
180
4
60
5
100
6
95
Stock
100
100
100
60
60
120
120
90
90
95
95
95
Second-tier
supplier
Prodn.
100
100
100
80
80
100
100
95
95
95
95
95
100
60
120
90
95
95
Orders
3
Stock
Items
Prodn.
100
80
100
95
95
95
Orders
2
Original
equipment
manufacturer
First-tier
supplier
Stock
100
100
100
90
90
95
95
95
95
95
95
95
100
90
95
95
95
95
Orders
1
Items
Prodn.
Stock
100
100
100
95
95
95
95
95
95
95
95
95
100
95
95
95
95
95
Orders
OEM
Items
Market
Items
Source: Slack, N., Chambers, S. and Johnston, R. (2007). Operations Management, 5th edn, Harlow:
Financial Times Prentice Hall. Reproduced with permission of Pearson Education Ltd.
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.21
Supply Chain Dynamics
‘Soft’ supply dynamics
Look for the perception gaps
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.22
Market requirements
Gap?
Gap?
What A
thinks B
wants
Linked?
What B
thinks C
wants
What B
thinks it
wants
Gap?
Operation A
What C
thinks it
wants
Supplier selection
strategy
Gap?
Operation B
Gap?
Supplier
development strategy
How A
thinks it is
performing
How B
thinks A is
performing
Operation C
Gap?
How C
thinks B is
performing
How B
thinks it is
performing
Linked?
Gap?
Gap?
Operations performance
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.23
Supply Chain Dynamics
Wholesaler’s
orders to
manufacturer
Manufacturer’s
orders to its
suppliers
0
Supplier
Time
0
Manufacturer
Time
Store’s orders
to wholesaler
0
Whole
-saler
Time
Sales from
store
0
Retail
Store
Time
Consumers
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.24
Supply Chain Dynamics
Supply chains with different end objectives
need to be managed in different ways
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.25
Supply Chain Dynamics
Manufacturer
Customer responsive supply
Information
Products
Supplier
Depot
Depot
Outlets
Depot
Products
Supplier
Information
Manufacturer
Efficient fast throughput supply
Depot
Outlets
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.26
Match supply chain characteristics to the nature of demand
Nature of Demand
EFFICIENT
RESPONSIVE
Supply chain objectives
FUNCTIONAL PRODUCTS
Predictable
Few changes
Low variety
Price stable
Long lead time
Low margin
Match
Mismatch
INNOVATIVE PRODUCTS
Unpredictable
Many changes
High variety
Price markdowns
Short lead time
High margin
Mismatch
Match
(After Fisher)
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012
Slide 5.27
Performance
Robustness, reduction, and rapidity in supply risk
Robustness
Time
Source: Dr Brian Squire, Manchester Business School.
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, © Nigel Slack and Michael Lewis 2012