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Unit Five

General Overview to Supply Chain Management

5.1 Definition of Supply Chain Management.
Supply chain encompasses all activities associated with:-
the flow and transformation of goods from the raw
materials stage, through the end user,
as well as the associated information flows, material and
information flow both up and down the supply chain.
A supply chain is a network of facilities and
distribution options that performs :
the functions of procurement of materials,
transformation of these materials into intermediate and
finished products, and the distribution of these finished
products to customers
upstream supplier network and its down stream
distribution channel.
From this definition, the supply chain includes:-
the management of information systems,
sourcing and procurement,
production scheduling,
order processing,
inventory management,
customer service, and after market disposition of
packaging and materials.
The supplier network consists of all organizations
that provide inputs, either directly or indirectly, to
the focal firm.
First, supply chains are essentially a series of linked
suppliers and customers;
From the focal firms perspective, the supply chain
includes internal functions, upstream suppliers, and
downstream customers
The second major part of supply chain management
involves the management of upstream external
supply chain members.
To manage the flow of materials - upstream
organizations in a supply chain, firms employ an array
of managers who ensure that the right materials arrive
at the right locations, at the right time
Purchasing managers are responsible for ensuring that
a) the right suppliers are selected,
b) meet performance expectations,
c) appropriate contractual mechanisms are employed,
and a good relationship is maintained with these
Materials managers are responsible for:-
a. planning, forecasting, and
b. scheduling material flows between suppliers in the
c. work closely with production schedulers to ensure
that suppliers are able to deliver the materials on
time to the required locations,
d. plan ahead of actual production and delivery dates.
Finally, a firms external downstream supply
chain encompasses all of the downstream
distribution channels, processes, and functions
that the product passes through on its way to
the end customer.
Within the down stream portion of the supply
chain, logistics managers are responsible for the
actual movement of materials between
Distribution management involves the
management of packaging, storing, and
handling of materials at receiving docks,
warehouses, and retail outlets.
Supply chain management can be seen as
the process of strategically managing the
procurement, movement and storage of
materials, parts and finished inventory through
the organization and
its marketing channels in such a way that
current and future profitability are maximized
through the cost effective fulfillment of
5.2 Evolution of Supply Chain Management (SCM)
The concept of supply chain existed right from the
evolution of trade.
First, there was a fragmented supply chain
Every department was an isolated island and
hostile (unfriendly) relationships were observed
with other trading organizations like suppliers,
wholesalers, dealers, etc.
The scenario started changing by the
advent(arrival) of the
Material Requirement Planning (MRP) systems,
Enterprise Resources Planning (ERP) systems.
The organizations started evolving as one entity
and internal supply chain started becoming
The relationships between the trading
organizations were improving which was referred
to as partnership.
This evolution ultimately resulted into supply
chain management
SCM function is the outgrowth of the unified
evolution of manufacturing management and
logistics management functions.
logistics management evolved from unified
evolution of materials management and sales
and distribution
cont Supply chain

Manufacturi Logistics
ng management

Sales and Materials

Customers and supplies were treated as
external entities
Organizations were looking at the various
departments including:- sales, production,
finance, human resource, etc as separate
functionalities and no cohesiveness was
observed amongst them.
On the contrary, purchase and the production
planning department were seen one
primal application of integration philosophy
was seen through MRP applied there.
In SCM age, all organized players are seen as
one entity
It means the manufacturing organization
closely operates with all the trading partners
including customers at one side and suppliers
at the other side
The firm integrates all of its internal supply
chain operations as well as the external supply
chain operations to deliver value to the final
5. 3 Elements of Supply Chain
In any given supply chain there is some
combination of companies who perform different
Producers or manufacturers are organizations
that make a product. producers of raw material/
finished goods.
Distributors are companies that take inventory
in bulk from producers and deliver a bundle of
related product lines to customers.
Retailers stock inventory and sell in smaller
quantities to the general public. This organization
also closely tracks the preferences and demands of
the customers that it sells to.
Customers are any organizations that purchases
and uses a product
Service providers
These are organizations that provide services to
producers, distributors, retailers, and customers.
Examples of supply chain structure are shown
Examples of supply chain structure are shown

Simple Supply Chain

Supplier Company Customer

Extended supply chain

Ultimate Supplier Company Customer Ultimate

supplier consumer

5.4 Process view of a supply chain
A supply chain is a sequence of processes and
flows that take place within and between
different supply chain stages and combine to fill
a customer need for a product

There are two different ways to view the

processes performed in a supply chain

1.Cycle view: - the processes in a supply chain are

divided into a series of cycles, each performed at
the interface between two successive stages of a
supply chain.
1.Push/pull view: - the processes in a supply
chain are divided into two categories based
executed in response to a customer order or
in anticipation of customer orders.
2.Pull processes are initiated by a customer
order, and push processes are initiated and
performed in anticipation of customer orders
1. Cycle view of supply chain processes
Supply chain processes can be broken down into
the following four processes cycles.
a. Customer order cycle
b. Replenishment cycle
c. Manufacturing cycle
d. Procurement cycle
Each cycle occurs at the interface between two
successive stages of the supply chain.
A cycle view is very useful operational decisions,
because it clearly specifies the roles and
responsibilities of each member of the supply
a. Customer order cycle
occurs at the customer/ retailer interface and includes
all processes directly involved in receiving and filling the
customers order.
This cycle at a retailer site, and the cycle primarily
involves filling customer demand.
The retailers interactions - start when the customer
arrives /contact is initiated and ends when the
customer receives the order
The processes involved in the customer order cycle are:
Customer arrival
Customer order entry
Customer order fulfillment
Customer receiving
Customer arrival - the term customer arrival
refers to the customers arrival at the
location where he or she has access to his or
her choices and makes a decision regarding a
It can be physical contact, calls/ a mail order,
web or an electronic link to a mail order firm
a key goal is to facilitate the contact between
the customer and the appropriate product
Customer order entry - it refers to customers
telling the retailer what products they want to
purchase and the retailer allocating products to
Customer order fulfillment - the customers
order is filled and sent to the customer.
The objective:- to get the correct and complete
orders to customers by the promised due dates
and the lowest possible cost.
Customer order receiving - the customer
receives the order and takes ownership.
Records of this receipt may be updated and cash
payment initiated
b. Replenishment cycle
occurs at the retailer/distributor interface and
includes all processes involved in replenishing
retailer inventory
Initiated when a retailer places an order to
replenish inventories to meet future demand
objective:- to replenish inventories at the
retailer at minimum cost while providing the
necessary product availability to the customer
The processes include:
Retail order trigger
Retail order entry
Retail order fulfillment
Retail order receiving
Retail order trigger
Objective:- to maximize profitability by
balancing product availability and cost
The out come :-is that a replenishment order is
Retail order entry:-is similar to customer
order entry at the retailer.
The only difference is that the retailer is now
the customer placing the order with the
distributor or manufacturer.
Retail order fulfillment
Is very similar to customer order fulfillment
except that it takes place either at the
distributor or manufacturer and
A key difference is the size of each order

Retail order receiving the retailer must

receive it physically, update all inventory
records, and settle all payable accounts.
c. Manufacturing cycle
occurs at the distributor/ manufacturer interface and
includes all processes involved in replenishing
distributor inventory
It presented by:-
customer orders,
replenishment orders from retailer or distributor, or
by the forecast of customer demand and current
product availability in the manufacturers finished
product warehouse
The processes include:-
Order arrival from the distributor, retailer, or customer.
Production scheduling
Manufacturing and shipping
Receiving at the distributor, retailer, or customer.
Order arrival
distributor sets a replenishment order generate based
on the forecast of future demand and current product
The resulting order is then conveyed to the
Production scheduling: orders are allocated to a
production plan or schedule
Manufacturing and shipping :-the manufacturer
produces to the production schedule while meeting
quality requirements.
the product is shipped to the customer, retailer,
distributor, or finished product warehouse.
Receiving :-the product is received at the distributor,
finished goods warehouse, retailer, or customer, and
inventory records are updated.
d. Procurement cycle
occurs at the manufacturer/ supplier
interface and includes all processes necessary
to ensure that materials are available for
manufacturing to occur according to schedule.
In PC, the manufacturer orders components
from suppliers D/ces
retailer/distributor orders are triggered by
uncertain customer demand,
Component orders are dependent on the
production schedule
2. Push/ pull view of supply chain processes
All processes in a supply chain fall into one of two
categories, depending on the timing of their
execution relative to customer demand
1. In pull processes, execution is initiated in
response to a customer order
2.Push processes are those that are executed in
anticipation of customer orders
At the time of execution of a push processes,
demand is not known and must be forecast
Pull processes:- referred to as speculative
processes because they respond to speculated
rather than actual demand
A push/ pull view of the supply chain is very
useful when considering strategic decisions
relating to supply chain design
5.5 Decisions phases in a supply chain
Successful supply chain management requires
several decisions relating to:-
the flow of information,
product, and funds
These decisions fall into three categories/
phases depending on the frequency of each
decision and the time frame over which a
decision phase has an impact
1.Supply chain strategy or design
company decides how to structure the supply
It decides what the chains configuration will be
and what processes each stage will perform
Decisions made during this phase are also referred
to as strategic supply chain decisions.
Strategic decisions made:-
location and capacities of production and
warehousing facilities,
products to be manufactured or stored at various
modes of transportation to be made and
type of information system to be utilized
2. Supply chain planning.
companies define a set of operating policies that
govern short term operations
Planning includes decisions regarding:-
which markets will be supplied from which locations
Planning establishes parameters within which a
supply chain will function over a specified period
of time
In the planning phase, companies must include
uncertainty in demand, exchange rates and
competition over this time horizon in their
3. Supply chain operations
The time horizon here is weekly or daily, and during this
phase companies make decisions regarding individual
customer orders
At the operational level, supply chain configuration is
considered fixed and planning policies already defined
The goal of supply chain operations is to implement the
operating policies in the best possible manner
Firms allocate individual orders to inventory or
production, set a date that an order is to be filled,
generate pick lists at a warehouse,
allocate an order to a particular shipping mode and
set delivery schedules of trucks, and place replenishment
5.6 Drivers of Supply Chain
To understand how a company can improve
supply chain performance in terms of
responsiveness and efficiency, we must examine
the five drivers of supply chain performance:
a. inventory,
b. transportation,
c. facilities,
d. production and
e. information
These drivers not only determine the supply
chains performance in terms of responsiveness
and efficiency, they also determine whether
strategic fit is achieved across the supply chain
Inventory is all raw materials, work in process,
and finished goods within a supply chain
Inventory is an important supply chain driver
because changing inventory policies can
dramatically alter the supply chains efficiency
and responsiveness
However, the creation and storage of
inventory is a cost and to achieve high level of
efficiency, the cost of inventory should be kept
as low as possible
Role in the Supply Chain
Inventory exists in the supply chain because:-
mismatch between supply and demand
it is economical to manufacture in large lots
that are then stored for future sales
increase the amount of demand that can be
satisfied by having the product ready and
available when the customer wants it
to reduce cost by exploiting any economies of
scale that may exist during both production
and distribution
Inventory:- significant impact on the material
flow time in a supply chain.
Another significant impact is throughput, the
rate at which sales to the end consumer occur
If inventory is represented by I, flow time by
T, and throughput by R, the three can be
related using Littles law as follows:
For example, if the flow time of an auto assembly
process is 10 hours and the throughput is 60 units
an hour, Littles law tells us that the inventory is
10* 60= 600units. If we were able to reduce
inventory to 30 units while holding throughput
constant, we would reduce our flow time to five
hours. Note that in this relationship, inventory
and throughput must be in the same units.
The logical conclusion here is that inventory and
flow time are synonymous in a supply chain.
Because reduced flow time can be a significant
advantage in a supply chain, managers should use
actions that lower the amount of inventory
needed with out increasing cost or reducing
Role in the competitive strategy
If a firms competitive strategy requires a very
high level of responsiveness, a company can
use inventory to achieve this responsiveness
by locating large amounts of inventory close
to the customer
use inventory to make it more efficient by
reducing inventory through centralized
It support a competitive strategy of being a
low cost producer
There are three basic decisions to make
regarding the creation and holding of
1.Cycle inventory :- amount of inventory needed
to satisfy demand for the product in the
period between purchases of the product.
Companies tend to produce and to purchase
in large lots in order to gain the advantages
economies of scale can bring.
The basic tradeoff supply chain managers face
is the cost of holding larger lots of inventory
versus the cost of ordering product frequent
2.Safety inventory :- inventory held just in case
demand exceeds expectation;
It is held to counter uncertainty
Choosing safety inventory involves making
a trade off between the costs of having too
much inventory and
the costs of losing sales due to not having
enough inventories.
3.Seasonal inventory:- inventory that is built up in
anticipation of predictable increases in demand
that occur at certain times of the year
Inventory that is built up to counter predicable
variability in demand
Inventory in periods of low demand and store it
for periods of high demand
Managers face key decisions in determining
whether to build seasonal inventory or not. much
to build
cost of carrying the additional seasonal inventory
versus the cost of having a more flexible
production rate
Overall trade off: responsiveness versus efficiency
The fundamental trade off managers face
when making inventory decisions is between
responsiveness and efficiency
Increasing inventory will generally make the
supply more responsive to the customer
However, this choice comes at a cost, but
decreases efficiency
Therefore, a supply chain manager can use
inventory as one of the drivers for reaching
the level of responsiveness and efficiency that
the competitive strategy targets
b. Transportation
Movement of everything from raw material to
finished goods between different facilities in a
supply chain
In transportation the trade-off between
responsiveness and efficiency is manifested in the
choice of transport mode
It has impact on both responsiveness and
Faster transportation, allows a supply chain to
more responsive but reduces its efficiency
the optimal decision for the company often
means finding the right balance between the two
There are six basic modes of transport that a company
can choose from:
1.Ship which is very cost efficient but also the slowest
mode of transport
2.Rail which is also very cost efficient but can be slow.
3.Pipelines can be very efficient but are restricted to
commodities that are liquids or gases such as water,
oil, and natural gas
4.Trucks are a relatively quick and very flexible mode of
transport. Trucks can go almost anywhere.
5.Airplanes are a very fast mode of transport and are
very responsive
6.Electronic transport is the fastest mode of transport
and it is very flexible and cost efficient
Role in the supply chain
They are the locations to or from which the inventory is
Within a facility, inventory is either transformed into
another state or stored before being shipped to the
next stage.
Role in the competitive strategy
When inventory perform their functions are key driver
of supply chain performance in terms of
responsiveness and efficiency.
For Ex. companies can gain economies of scale when a
product is manufactured or stored in only one location;
this centralization increase efficiency but the cost of
reduction comes at the expense of responsiveness
d. Location
Location refers to the geographical sitting of supply chain
A basic trade off here is whether to centralize to gain
economies of scale or decentralize to become more
responsive by being closer to the customer.
In Making Decision, Companies must consider issues
related to local area include:-
macroeconomic factors,
quality of workers,
cost of workers,
cost of facility,
availability of infrastructure,
proximity to customers and the rest of the network, and
tax effects.
e. Capacity: flexibility versus efficiency
Companies:-decide what a facilitys capacity to
perform its intended function/functions will be
Excess capacity, however, costs money and
therefore can decrease efficiency
f. Production
Production refers to the capacity of a supply
chain to make and store products
The facilities of production are factories and
Managers face when making production
decisions is how to resolve the trade-off between
responsiveness and efficiency
g. Warehousing methodology
1.Stock-keeping unit (SKU) storage- in this traditional
approach, all of a given type of product is stored together
efficient and easy to understand way to store products
2.Job lot storage- in this approach, all the different products
related to the needs of a certain type of customer/needs of
a particular job are stored together.
This allows for an efficient picking and packing operation
but usually requires more storage space than the
traditional SKU storage approach.
3.Cross docking- in this approach, product is not actually
warehoused in the facility.
large lots are then broken down into smaller lots
Smaller lots of different products are recombined according to
the needs of the
day quickly loaded onto outbound trucks that deliver the
products to their final destination
h. Information
Information is the basis upon which to make
decisions regarding the other four supply
chain drivers
It is the connection between all of the
activities and operations in a supply chain
Information, however, deeply affects every
part of the supply chain in many ways
Information is used for two purposes in any
supply chain:
1.Coordinating Daily Activities related to
production; inventory; location; and
The companies in a supply chain use available
data on product supply and demand to decide on
weekly production schedules, inventory levels,
transportation routes, and stocking locations.
2.Forecasting and planning to anticipate and meet
future demands.
Information is a driver whose importance has
grown as companies have used it to become both
more efficient and more responsive
Components of information decisions
a. Push versus pull
Push systems:- require information in the form of
elaborate material requirements planning
systems to take the master production schedule
and roll it back, creating schedule for suppliers
with part types, quantities, and delivery dates.
Pull systems:- require information on actual
demand to be transmitted extremely quickly
throughout the entire chain so that production
and distribution of parts and products can
accurately reflect the real demand
b. Coordination and information sharing
Supply chain coordination occurs when all the
different stages of a supply chain work toward
the objective of maximizing total supply chain
profitability rather than each stage devoting
itself to its own profitability
Managers must decide how to create this
coordination in the supply chain and what
information must be shared in order to
accomplish this goal
c. Forecasting and aggregate planning
Forecasting is the art and science for making projections
about what future needs and conditions will be
Obtaining forecasting information frequently means using
sophisticated techniques to estimate future demand or
market conditions.
Managers must decide how they will make forecasts and to
what extent they will relay on them to make decisions.
Companies often use forecast both on a tactical level to
schedule production and on a strategic level to determine
whether to build new plants or even whether to enter a
new market.
Aggregate planning transforms forecasts into plans of
activity to satisfy the projected demand. A key decision
managers face is how to use aggregate planning both at the
managers stage in the supply chain and throughout the
entire supply chain.
Enabling technologies
Many technologies exist that share and analyze
information in the supply chain
Managers must decide which technology to use
and how to integrate these technologies into their
companies and their partners
Some of these technologies include:
1.Electronic data interchange (EDI) allows companies to
place instantaneous, paperless purchase orders with
EDI is not only efficient, but it also decrease the time
needed to get products to customers, as transactions
can occur more quickly and accurately than when they
are paper based.
2. The internet has critical advantages over EDI with respect
to information sharing. The internet can be accessed by all
and conveys much more information and therefore, offers
much more visibility than EDI.
3.Enterprise Resource Planning (ERP) systems provide the
transactional tracking and global visibility of information
from any part of a company and its supply chain that
allows intelligent decisions to be made.
This real time information helps a supply chain to improve
the quality offers operational decisions.
ERP systems keep track of the information, where as the
internet provides one method with which to view this
4.Supply chain management (SCM) software adds a higher
layer to ERP systems
This software provides analytical decision support in
addition to the visibility of information
ERP systems show a company what is going on, whereas
SCM systems help a company decide what it should do
Overall trade-off: responsiveness versus efficiency
As with the entire supply chain, the fundamental trade
off with the information driver is between
responsiveness and efficiency
Many information systems increase both
responsiveness and efficiency
However, managers will soon need to make the trade-
off between the cost of information (a reduction in
efficiency) and the responsiveness that information
creates in the supply chain
How could a supermarket use inventory to increase the
responsiveness of its supply chain?
How could an auto manufacture use transportation to
increase the efficiency of its supply chain?
How could manufacturer increase responsiveness
through its facilities?
Unit Six
Buyer-supplier Relationships
6.1 What is buyer- supplier relationship?
A buyer may prefer to have a reactive kind of
relationship; that is,
the relationship is one time,
focused on price,
choosing to maximize his gains at the expense of
his counterpart.
Or a buyer may want to establish a win-win and
long-term relationship with a supplier.
Definition of commercial
1. .Profitable; having profit as the main goal

Definition of relationship
1. The state of being related....
2. The friendship, contact, communications etc which exist
between people
Concerned with people, contact and communication
Purchasing and supply relationships involve a degree of
Entered into for the purpose of mutual benefit
Important to establish effective relationships with
The nature of an effective relationship will vary with
circumstances and importance to the buying organisation
of the suppliers product or service
Then, we can understand that buyer-supplier
relationship is about the attitudes of both the
buyer and the supplier
It specifies what kind of relationship they
choose to have with their counterpart
Is it a transactional kind of relationship? Or
collaborative or alliance kind of relationship?
There three basic types of buyer- supplier
6.2 Types of buyer-supplier relationship
There are three types of Buyer- Supplier relationships:
2.Collaborative, and
6.2.1 Transactional Relationships
Is most common and most basic type of relationship
Such a relationship is neither good nor bad
Transactional simply describes an arms-length
relationship where in neither party is especially
concerned with the well-being of the other
Virtually all buying firms will have transactional
Most will have collaborative ones and some will have
strategic alliances
Characteristics of transactional relationships
An absence of concern by both parties about the
other partys well-being
With transactional relationships, there is little or
no concern about the other partys well-being
what one party wins, the other loses
One of a series of independent deals
Each transaction is entered into on its own
Little or no basis exists for collaboration and
Costs, data and forecasts are not shared
Arms-length transactions, not openness, are
characteristics of transactional relationships
Price is the focus of the relationship
Getting the best price is the focus of the transaction
Ideally, total cost analysis precedes any procurement
little or no concern for the others well-being, neither
buyer nor supplier will rush to the others assistance in
bad times or when problems arise.
A minimum of purchasing time and energy is required
to establish prices
Market focuses normally establish prices in
transactional relationships
Transactional purchases lend themselves to
e-procurement and, in some cases, reverse auctions
Relatively less purchasing time and effort are
required to establish price
Lower skill levels of procurement personnel are
Much less judgment and managerial expertise
are required with the vast majority of
transactional procurements
The potential for communication difficulties is much
greater with transactional relationships than with
collaborative or alliance ones
Considerable investment in expediting and the
monitoring of incoming quality is required to ensure
timely delivery of the right quality
Transactional relationships are inflexible when
flexibility may be required
Changing technology and changing market conditions
can require flexibility in buyer /supplier relationships.
Transactional procurements tend to result in more
delivery problems than do collaborative and strategic
alliance ones
Friends look out for friends, not opportunistic buyers
or suppliers
Quality with transactional relations will be
only as good as required
Transactional suppliers tend to provide the
minimum service required
Buyers tend to experience less effective
performance by their transactional suppliers
than do those employing collaborative or
strategic relationships
Transactional suppliers have much less to lose
from a dissatisfied customer than do
collaborative strategic relationship suppliers
Transactional customers are subject to more
supply disruptions than are collaborative or
alliance ones
Buyers who maintain continuing,
collaborative relations with their suppliers are
much less subject to supply shortages than are
opportunistic ones.
Since the supplier recognizes the transactional
and price nature of the relationship, it is not
motivated to invest time and energy in the
development of the potential buyers products
6.2.2 Collaborative Relationships
Collaborative and alliance relationships tend to
result in lower total costs than do transactional
relationships for several reasons
Process improvements and the adoption of
technical innovations require a high level of
certainty and continuity of demand
The risks and uncertainties present with
transactional relationships reduce the likelihood
of investments in R&D and training as well as the
procurement of new, more efficient equipment
focused on the customer firms needs
Thus, major opportunities for cost reduction
within supplying organizations may be lost
with transactional relationships
Cost reductions resulting from value
engineering and value analysis (VE/AA) are
much more likely with collaborative and
alliance relationships
Suppliers are more likely to take the initiative
to reduce costs through VE/VA when they are
involved in long-term relations than with
short-term transactional ones
Long-term performance agreements allow
suppliers an opportunity to reduce their costs
The extended learning curve effect with both
production and services allows collaborative and
alliance suppliers to reduce their costs and share
these savings with customers
Collaborative and alliance relations replace the
market forces employed by transactional
procurement with controlled competition,
benchmarking, and advanced supply
management pricing practices
The results are lower total costs, higher quality,
reduced time to market, and reduced risk of
supply disruptions
Researchers Stanley and Pearson found that the
three most important factors in a successful
buyer-supplier relationship are:
(1) two-way communication;
(2) the suppliers responsiveness to supply
managements needs, and
(3) clear product specifications
Both collaborative and alliance relationships
require a quality of management
Interdependence and necessity of
cooperation is the key difference between
collaborative relationships and transactional
All elements of relationship management:-
trust building,
joint efforts, and
planning and
fostering interdependency,
managed to achieve competitive advantage
Interdependency provides many benefits to
both parties to the relationship:
cost competitive
customers firm enjoys the benefits of early
supplier involvement (ESI)
Improvements in cost, quality , time to
market, and the leveraging of supplier
technology result
end objective:- reduction in total costs
Improved quality
timeliness also result
Collaborative suppliers look out for their
friends, not their opportunistic customers
Collaborative relationship help
cushion(reduce) bad times
Both customers and suppliers who value each
other, based on long-term relations and
respect, are more likely to come to each
others aid during times of adversity
The relative level of certainty and continuity of
demand in collaborative and alliance
relationships increases
the likelihood of investments in R&D,
training, and the procurement of new,
more efficient equipment focused on the
customer firms needs
The major disadvantage of collaborative and
alliance relationships are:-
the amount of human resources,
time, and
energy required to develop and mange the
6.3 Supply Alliances
D/ce b/n collaborative relationships and supply
alliance- presence of institutional trust in
Supply alliances reap incredible benefits as a
result of:-
physical asset specialization and
human specialization
Dyer defines physical asset specialization as:-
specific capital investments (e.g., in customized
machinery, tools, information systems, delivery
processes and so forth) that
allow for faster throughput and greater product
Physical asset specialization allows,
for product differentiation and
may improve quality by increasing product
Human specialization refers to relationship
specific know-how accumulated by individuals
through long-standing relationships
substantial experience working together and have
accumulated specialized information and
language that allows them to communicate and
coordinate effectively with each other
results in higher quality, faster development
times, and lower costs
The Primary Benefits to Supply Alliances
Lower total costs
Reduced time to market
Improved quality:- design of experiments and
supplier certification
Improved technology flow from suppliers
Improved continuity of supply Alliance
Alliance Share Several Attributes:
Focus of most supplier alliances:- achieving
the simultaneous objectives of continuous
improvements along with squeezing cost out
A high level of interdependence and
commitment is present
An atmosphere of cooperation exists
Potential conflicts are addressed and
resolved openly.
When problems occur, the focus is a search
for the root cause, not the assignment of
The alliance is controlled:-
formal and informal interpersonal connections,
information systems, and
internal infrastructures that enhance learning
Openness exists in all areas of the relationship
including :-
long-term objectives,
technology, and
the supply chain itself
The alliance is a system evolves with the objective of
creating new benefits for both parties
The alliance partners share a vision of the future is the
area of the interface.
Ethics take precedence over expediency
The relationship is adaptable in the face of:-
changing economics,
technology, and
environmental issues
The design of experiments and supplier
certification are the norm with supply
It result is improved quality at a lower total
Negotiations and renegotiations occur in a
win-win manner
Executive level commitment and alliance
champions protect the alliance form incursion
by nonbelievers
In supply alliances are so attractive, why arent
they the way to conduct all business?
Alliances are a very resource-intense approach
to supply management and tend to be
reserved for the most critical relationships
6.3 Which Relationship is Appropriate?
How does a supply management executive determine
whether a relationships should be transactional,
collaborative, or a strategic alliance? Several key
questions should be asked to determine the strategic
elements of a relationship:
1. Are there many relatively undifferentiated suppliers
providing what amounts to interchangeable
commodities? If so, a collaborative alliance or
relationship would not be appropriate: Try a
transactional relationship instead.
2.Does the potential supplier possess economic power
which it is willing to employ over its customers? A
transactional or very carefully developed and managed
collaborative relationship is usually appropriate.
3.If there is recognition by both parties of the potential
benefits of an alliance, but adequate qualified human
resources are not available at one or both firms, a
collaborative relationship is usually appropriate.
4.A collaborative relationship frequently is an appropriate
first step on the road to strategic alliances
5.Is one supplier head and shoulders above the rest in
terms of the value it provides, including price,
innovation, ability to adapt to changing situations,
capacity to work with your team, task joint risks, and so
on? If so, an alliance may be in order, assuming that
the supplier is willing to enter into an interdependent,
trusting relationship.
6.Are some suppliers strategic to your business? In
both words, do they have a major impact on your
competitive advantage in the marketplace? Are you
highly reliant on them to provide a unique product,
technology, or service? If so, an alliance may be vital.
7.Would your company benefit greatly if the supplier
were more integrally connected with your company,
perhaps with their engineers working side by side with
yours, or collocating their manufacturing facilities
adjacent or within yours? If yes, consider an alliance.
8. Do your customers require high degrees of flexibility
and speed of responsiveness, causing you to demand
the same performance from your suppliers? This is a
classic alliance driver.
Trust is another key factor differentiating the three
classes of relationships
The simplest definition of trust is being confident that
the other party will do what is says it will do.
Some level of trust must be present in all three of our
types of relationships
But the level of trust increases with collaborative
relationships and becomes an essential characteristic
with strategic alliance
Few of these relationships are pure:
A transactional relationship may have one or more
collaborative characteristics while a collaborative
relationship may have one or more transactional as
well as some alliance characteristics.
For suppliers and buyers who comprehend the
value of shifting from tactical, transactional
based relationships to strategic value-based
alliance relationships, it will be essential to
engaged the multidimensional assessment of
the elements to Total Cost of Ownership to
determine exactly where cost can be reduced,
value enhanced, and substantial competitive
advantage created.
Questions to be addressed before proceeding
While strategic supplier alliances receive a
great deal of media coverage and discussion
within the supply management community,
are they for everyone? Will the benefits of an
alliance out weight the effort, risk, and
resources required? For those supply
management professionals and organizations
that are investigating the possibility of
strategic supplier alliances, it can be helpful to
think over the following questions:
Is there a danger that the supplier may act in an
opportunistic manner over time?
Do electronic systems at the purchasing and supplier
organizations allow for optimum communication and
sharing of information?
Is the potential strategic alliance supplier well
equipped, in terms of knowledge, expertise, and
resources, to stay current in the industry?
Are both the purchasing and supplier organizations
willing to keep attention focused on the joint customer,
in order to establish supply chain objectives and goals?
Are there other suppliers in the marketplace, perhaps
now more accessible because e-procurement, who are
worth investigating before committing to a strategic
Has the supply manger been thoroughly
trained in managing an alliance relationship?
Is the purchasing organization proud to be
aligned and associated with the supplier
organization, as they present a joint marketing
front for the links further downstream in the
supply chain?
Is the purchasing organization comfortable
with the level of risk associated with reducing
the supply chain?
Is the purchasing organization comfortable
with the level of risk associated with reducing
the supply base?
Are both supplier and buyer aligned in what their
ultimate customer considers to be valuable?
If there is substantial risk for the supplier to
develop new technologies, sub-systems,
products, processes, or service support, is the
buying firm willing to share or reduce the risks?
Are both supplier and buyer aligned in their
respective visions to be able to make long term
commitments to each other?
If an alliance is in order, are there sufficient
operational points of interaction where the
supplier can engage with the buying firm, such as
joint development programs, just-in-time
inventory, electronic communication, or
collocation of service personnel?
6.4 Situations where in Alliances May Not Be Appropriate
Quite obviously, alliances are not always appropriate
Professor Ralph Kauffman has identified 14 such
situations and has developed them into 5 major
1. Stability of the prices, market, and buyers demand
a. Price volatility: commodities traded on open markets
that have significant price volatility
The problem for a partnership/alliance is how to
share risks and benefits that may result from price
Some arrangements can be made to mitigate this
problem including price adjustment mechanisms
based on the costs or indexes and, for some
commodities, hedging in futures markets
b. Demand Volatility: Materials or services that have
significant volatility in individual buyer demand
If the buying firms needs are not predictable, the supplier
must deal with the likelihood of overstock or stock out or
erratic productions schedules
To do this may generate additional costs for the supplier
that must be built into the price that the buyer pays
c. High Switching Likelihood with High Switching Costs:
Situations with high switching costs that also have a high
likelihood of switching being desirable
Purchases that involve changing technology or critical
quality or other characteristics where there are at the same
time no strong suppliers may indicate a high likelihood of
needing to switch in spite of high switching costs
In such cases, maximum flexibility is desirable
2. Capability of potential suppliers
a.No Partnership/Alliance-Capable Suppler for the Item:
The lack of a capable supplier would dictate some
other form of supply relationship
No partnership or alliance would be preferable to
one with an inept(incompetent) supplier.
b.No Partnership/Alliance-Capable Supplier in the
Geographic Area:
Depending on the material or service required,
there may be regions where a partnership or
alliance is not possible on account of lack of a
competent supplier in that region.
c. Rapid Technological Change:
Situations of rapid industry wide technological
change where the buyer would be
disadvantaged if locked into one supplier
Not all supplier have the capability to remain
technological competitive
d. Mismatch of Clock Speed:
If the buying firms industry is changing and
developing more rapidly than that of the
suppliers industry it may be difficult to arrive
at a partnership or alliance that is fully
beneficial to the buyer
3. Competition in the supply market
a. Non competitive Market:
Noncompetitive markets where the supplier partner
may be in a position to take advantage of the buying
Generally a partnership or strategic alliance will
reinforce the suppliers power relative to the buying
b. Supplier Dependency Creation:
Situations where extreme dependency on a particular
supplier would be created by a partnership or strategic
If the buying company is relatively small compared to
the selling company and the buyers business is not
vital to the seller, the buyer may be at risk of future
For example, a buyer becomes totally dependent
on a seller through a partnership or alliance for a
material vital to the supplier and for which there
are few if any, alternative suppliers
If the supplier determines at a future time that
the business is not compatible with its business
objectives, it may terminate agreement and
cause supply difficulty for the buyer
c. Neglected Areas:
Situations where purchases have been
mismanaged or not managed for years, e.g. many
types of indirect purchases.
In order to obtain the lowest total cost, a
relationship that leverages the free market
should be used
d. Suppliers Seeding to Reduce competition:
Situations where suppliers appear to be using
partnership/alliance as a marketing ploy(plan)
to eliminate competition and reduce industry
These may save cost in the short run but, if
the suppliers strategy truly is to reduce
capacity and competition, costs may increase
in the long run
Being locked into such a supplier would not
be desirable.
4. Benefits to the buying firm form the relationship
a. No Leverage from Partnership:
Situations where there is nothing to leverage
with a partnership/alliance
Typically, a partnership or alliance will leverage
some aspect of the exchange involved
Leveraged items include volume, total cost,
process or procedural cost, inventory, or
If there are no leverage possibilities, there may
not be a justification for the work involved in
establishing and maintaining a partnership or
b. No Hard Savings from Partnership:
Situation where hard savings are not present as
a result of a partnership/alliance
Soft savings such as non quantifiable quality
improvements and partial-person staff
reductions are nice but, unless they result in
some other cost avoidance, they never show
up on the bottom line.
To justify the work involved in establishing
and maintaining partnerships and alliance,
there must be some hard savings
5. Internal Buy-In to partnership
No Internal Customer Buy-In:
Situations where the internal customers of the
buying organization do not joint ownership with
supply management of the partnership/alliance
Most purchasing organizations use a team
approach to develop, implement, and maintain
partnership and alliance agreements
If that is not done, or if the internal customer
members of the team do not agree with all the
terms of the agreement, the partnership or
alliance will be likely to fail
Unit Seven
7.Specification and Standardization
7.1 Specification
What is specification?
Specifications are the most detailed method
of describing requirements
design specifications are the detailed
descriptions of:-
the materials,
parts, and
components to be used in making a product
They are the descriptions that tell the seller
exactly what the buyer wants to purchase
Specifications and standardization are two related
topics in the field of supply management
Specifications form what is called the purchase
Standardized parts, components, and services
may be included in the purchase description,
but standardization goes beyond mere
inclusion in a description
Standardization is treated in many companies
and supply chains as a philosophy for creating
competitive advantage
Purpose of specification
What are the importance of specification?
The purchase of specification forms the heart
of the procurement
purchase order or contract will be performed
to the satisfaction of the buying organization
frequently is determined at the time the
specification is selected or written
Purchase specifications serve a number of
purposes, among them to:
Communicate what to buy
Communicate suppliers what is required
Establish the tangible goods to be provided
Establish the intangible services to be provided, such
as :-
maintenance, and
Establish the standards against which :-
tests, and
quality checks are made
Balance the specification goals of:-
individual departments,
relevant suppliers,
desired product or service performance and cost
7.1.2 Categories of specification
Purchase speciation can be classified into two
brad categories:-
Simple (low detail) and
Complex (high detail)
The classification of simple or complex is a
reflection of the development of the specification
itself and not the complexity of the product or
service or the fulfillment of the specification
Complex or detailed specifications are used when
a simple specification is not possible or preferable
A complex specification requires more resources
and time to develop
Simple specifications:-
require less resources and time to develop than
complex specifications
completed with one sentence and
have little need for collaboration between
functional areas or supply chain members
There are six categories of simple specifications:-
1 desired performance,
2.function and fit,
3.brand or trade names,
4.samples market grades, and
5.qualified products
Ex. the specification of an accounting
department for supply management to
purchase12 Fujitsu Life book S Series model
4542 laptops with their default components
package and warranty is a complete, yet
simple, specification
1.Performance specifications
is the perfect method of describing a
Instead of describing an item in terms of its
design characteristics,
describe in words, and quantitatively where
possible, what the item is required to do
Potential suppliers are told only the performance
that is required
EX. Electronics, aircraft, and automobile companies,
for example, frequently use this method to buy
such common materials as electrical wire,
batteries, and radios
2.Function and fit specification
Such purchase descriptions are a variation of
performance specifications and are used in
early supplier involvement programs
With this approach, the design team
describes the function to be performed and
the way the item is to fit into the larger
system(e.g., automobile, computer, etc.)
together with several design objectives(cost,
weight, and reliability)
According to May, The optimal use of suppliers
special skills and processes is experienced when suppliers
are provided with a set of performance specifications.
3. Brand or Trade Names
Branding or differentiating a product is generally done to:-
develop a recognized reputation and
thus gain repeat sales,
protect the product against substitutes,
maintain price stability, and
simplify sales promotion
The primary reason most manufacturers brand their products
is to obtain repeat sales
Consumers develop a preference for brands
branded products sold at higher prices than unbranded
products of similar quality
Brand name products are among the simplest to describe on a
purchase order
4. Market Grades
Grading is a method of determining the quality of
A grade is determined by comparing a specific
commodity with standard previously agreed on
Grading is generally limited to natural products such
as lumber, wheat, hides, cotton, tobacco, food
products, and so on
The value of grades as a description of quality
depends on the accuracy
In buying graded commodities, industrial supply
managers often use personal inspection as a part of
their buying technique
Trade name, model number, part number, place of
manufacture, and similar identifying data describe
approved products on the QPL.
Complex specification
Complex or detailed specifications are descriptions that
tell the seller exactly what the buyer wants to purchase
A complex specification often goes beyond the design of a
product, to include specifications regarding:-
delivery schedule,
warranty, and service
There are four principle types of complex specifications: -
1.commercial standards,
2.design specifications,
3.engineering drawings, and
4.material and method-of- manufacture specifications
1.Commercial standards
Recurring needs for the same materials have led
industry and government to develop commercial
standards for these materials
is complete description of the item standardized
The description includes the quality of materials
and workmanship that should be used in
manufacturing the item, along with dimensions,
chemical composition, and so on
It also includes a method for testing both
materials and workmanship
Standard specifications have been prepared for
many goods in commercial trade
National trade associations,
standards associations,
national engineering societies,
the federal government, and
national testing societies all contribute to the
development of standard specifications and
standard methods of testing
Commercial standards are applicable to raw
materials, fabricated materials, individual
parts and components, and subassemblies
similar to purchasing by brand name
in both methods, the description of what is
wanted can be set forth accurately and easily
Commercial standards are more complex because
they require greater detail in the description
2.Design Specifications
For many items large number of buying firms
prepare their own specifications
By preparing its own specifications, a company
can often avoid the premium prices of brand
name items and the sole source problems of
patented, copyrighted, and proprietary products
Describing requirements with chemical or
electronic specifications, or with physical
specifications and accompanying engineering
drawings, entails some risk
For example, if a buying company provides
the exact chemical specifications of the paint
desired, it assumes complete responsibility for
the paints performance
3.Engineering Drawings
Engineering drawings and prints are occasionally
used alone, but more typically in conjunction
with other physical purchase descriptions
Engineering drawings may be part of design
specifications described above
Where precise shapes, dimensions, and spatial
relationships are required, drawings are the most
accurate method of describing what is wanted
Engineering drawings are used extensively in
describing quality for construction projects, for
foundry and machine shop work, and for myriads
of special mechanical parts and components
4.Material and method of Manufacture
These specifications are used most appropriately by
technically sophisticated large companies or
organizations dealing with small suppliers having
limited research and development staffs
When this method is used, prospective suppliers are
instructed precisely as to the specific materials to be
used and how they are to be processed
The buying firm assumes full responsibility for product
It believes that its own organization has the latest
knowledge concerning:-
techniques, and manufacturing methods for the item
being purchased
Specifications of this type are expensive to
Inspection generally is very expensive
Material and method-of- manufacture
specifications are used extensively by the
armed services and the Department of Energy
A modified version of these specifications is
sometimes used by industry
For example Large purchasers of paint
frequently request manufacturers of a
standard paint to add or delete certain
chemicals when producing paint for them
7.1.3 Development of specifications
Developing specifications can be a difficult
task to manage because it involves many
1.Informal approach
It emphasizes the concept of a supply managers
responsibility to challenge materials requests
top management urges designers to request
advice from supply managers and work with
them on all items that may involve commercial
Emphasis on person-to-person communication
and cooperation between individual supply
managers and designers
Using this approach, a company-oriented, cost
conscious attitude is developed at the grass-roots
level throughout the organization
Two potential problems exist with the
informal approach:-
The 1st lack of formalization through
corporate policy or organizational structure
may render the supply manager powerless
and make the approach completely ineffective
The second problem is that the supply
manager may create animosity (hatred) when
it is appropriate to challenge a specification
2.Supply Management Coordinator Approach
In the supply department for individuals, materials
engineers, serve in a cooperation capacity with the
design department
The materials engineer searches for potential
supply management problems in attempt to
mitigate them before the specifications are
The supply management coordinator approach is
highly structured, as well as expensive
It is also very effective
used whenever coordination problems stemming
from the technical nature of a firms product or
from the magnitude of its cost justify such an
3.Early Supply Management Involvement
Progressive firms increasingly are creating
design policies to involve supply management
in the early stages of new product
design engineers and production engineers
consulting supply management preparation
Because, supply management has commercial
experience and the market information
required to in considerations of specifications
4.Early Supplier involvement
To properly implement early supplier
involvement, a buying company should first
establish the policy of involving supply
management in the design process
Early supply involvement coupled with early
supply management involvement can
improve product quality and reliability,
while compressing development time and
reducing total material cost
5.Consensus Development Approach
Consensus development calls for
specifications to be greed upon by the
department managers
This collaborative approach falls short of
developing a formal team
When specifications conflicts arise and
consensus cannot be reached, final authority
for the decision should rest with the
department having responsibility for the
products performance
6.Cross-Functional Team Approach
This approach recognizes that a good specification is a
compromise among basic objectives
A specifications cross-functional team is established
,with representatives from:-
design engineering,
production engineering,
supply management,
quality and standards
On new product development, members of the design
team are involved, as appropriate, throughout the
development of the product and its specifications
7.2. Standardization
A uniform identification that is agreed on is called a
In business practice, the concept of standardization is
applied in either industrial or managerial
Industrial standardization can be defined as the
process of establishing agreement on uniform
identifications for definite characteristics of :-
service, and so on
Managerial standardization deals with such things as
operating practices, procedures, and systems
7.2.1 Source and types of standardization
In industry, there are three basic types of
materials standards:
international standards,
national standards, and
company standards
If a designer or user can not adapt a national
or international standard for his or her
purpose, the second choice is to use a
company standard
7.2.2 Benefits of Standardization
Standardization benefits an organization in a
variety of ways:
it enables mass production,
enables customization,
improves supplier coordination,
improve quality,
enables simplification,
enables delayed differentiation and, as a
result of many of the other benefits, lowers
1. Enables mass production
Standardized parts and components enable
management to stabilize production processes and
focus on continuous improvement, thereby
reducing costs
2.Enables customization
Standardized parts and modules enable
manufacturers to make a wide variety of finished
products from a relatively small number of parts
With standardization, the wide variety of finished
products may be assembled when ordered, thereby
reducing inventory carrying costs and increasing
flexibility to meet specific consumer demands
Ex. Dell exemplifies this in its ability to customize
for customers on the same the day the order is placed
3.Improves supplier coordination
Standard parts and components are
repetitively manufactured to the same design,
enabling investment by the producing
company in better machinery, training, and
The result is a significantly lower defect rate
4.Enables delayed differentiation
when customization of the product is accomplished as
close to customer demand as possible, the differentiation
of the product or service is delayed
For example, suppose a customer purchases a computer
online with a customized configuration of standard parts
and modules
The manufacturer has two possible ways to fill the order
The manufacturer can preassemble hundreds or even
thousands of computer configurations that customers may
want to they are ready to ship when the demand occurs
Or, using delayed differentiation the manufacturer stocks
standard components and modules that can quickly be
assembled into customized configurations
Delayed differentiation results in carrying much lower
inventory levels
5.Lowers inventories
Lower inventories results from the number of
distinct parts carried being reduced
Better quality from greater use of standards parts
and components reduces safety stock, thereby
reducing overall inventory levels
Standard parts and modules usually have more
certain and shorter supplier order lead times
Reduced uncertainty in production lead time
reduces the need for additional inventories
required for unreliable lead times
Shorter lead times directly translate into smaller
order quantities
7.2.3 Development of standardization
The benefits of standardization cannot be fully
realized when solely developed internally by design
The next level up is to involve cross-functional teams
with internal members from :-
supply management,
quality and other relevant functional areas
A standardization program can be approached in
various ways; but because so many departments and
suppliers are affected by standards decisions, a team
effort is the most appropriate approach
A standard team typically consists of
representatives from:-
marketing, and transportation
Relevant suppliers should also be included in the
team under the guidance of supply management
The standards team typically is charged with the
responsibility of obtaining input from all user
departments and relevant suppliers, reconciling
differences between them, and making the final
standards decisions