Adding Value Through Supply Chains

  1. Objective 7-8 Explain how a supply chain strategy differs from traditional strategies for coordinating operations among firms.

The term supply chain refers to the group of companies and stream of activities that work together to create a product. A supply chain (or value chain) for any product is the flow of information, materials, and services that starts with raw-materials suppliers and continues adding value through other stages in the network of firms until the product reaches the end customer.

Figure 7.13 shows the chain of activities for supplying baked goods to consumers. Each stage adds value for the final customer. This bakery example begins with raw materials (grain harvested from the farm). It also includes storage and transportation activities, factory operations for baking and wrapping, and distribution to retailers. Each stage depends on the others for success in getting freshly baked goods to consumers. However, a failure by any link can spell disaster for the entire chain.

Figure 7.13

Supply Chain for Baked Goods

Ten images show the chain of activities for supplying baked goods to consumers.

The Supply Chain Strategy

Traditional strategies assume that companies are managed as individual firms rather than as members of a coordinated supply system. Supply chain strategy is based on the idea that members of the chain will gain competitive advantage by working as a coordinated unit. Although each company looks out for its own interests, it works closely with suppliers and customers throughout the chain. Everyone focuses on the entire chain of relationships rather than on just the next stage in the chain.

A traditionally managed bakery, for example, would focus simply on getting production inputs from flour millers and paper suppliers, and then on supplying baked goods to distributors. Unfortunately, this approach limits the chain’s performance and doesn’t allow for possible improvements when activities are more carefully coordinated. Proper management and better coordination among supply chain activities can provide fresher baked goods at lower prices.

Supply Chain Management

Supply chain management (SCM) looks at the chain as a whole to improve the overall flow through a system composed of companies working together. Because customers ultimately get better value, supply chain management gains competitive advantage for each of the chain’s members.

An innovative supply chain strategy was the heart of Michael Dell’s vision when he established Dell Inc. Dell’s concept improves performance by sharing information among chain members. Dell’s long-term production plans and up-to-the-minute sales data are available to suppliers via the Internet. The process starts when customer orders are automatically translated into updated production schedules in the factory. These schedules are used not only by operations managers at Dell but also by such parts suppliers as Sony, which adjust their own production and shipping activities to better meet Dell’s production needs. In turn, parts suppliers’ updated schedules are transmitted to their materials suppliers, and so on up the chain. As Dell’s requirements change, suppliers up and down the chain synchronize their schedules to produce only the right materials and parts. As a result, Dell’s prices are low and turnaround time for shipping PCs to customers is reduced to a matter of hours instead of days.

Reengineering Supply Chains for Better Results

Process improvements and reengineering often are applied in supply chains to lower costs, speed up service, and coordinate flows of information and material. Because the smoother flow of accurate information along the chain reduces unwanted inventories and transportation, avoids delays, and cuts supply times, materials move faster to business customers and individual consumers. SCM offers faster deliveries and lower costs than customers could get if each member acted only according to its own operations requirements.

Outsourcing and Global Supply Chains

Outsourcing is the strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or services. The decision to outsource expands supply chains. The movement of manufacturing and service operations from the United States to countries such as China, Mexico, and India has reduced U.S. employment in traditional jobs. It has also created new operations jobs for SCM. Maytag, for example, had to develop its own internal global operations expertise before it could decide to open a new refrigerator factory in Mexico, import refrigerators from South Korea’s Daewoo, and get laundry appliances from South Korea’s Samsung Electronics. In departing from a long-standing practice of domestic production, Maytag adopted new supply chain skills for evaluating prospective outsourcing partners.

Skills for coordinating Maytag’s domestic activities with those of its cross-border partners didn’t end with the initial decision to get appliances from Mexico and Korea. Maytag personnel in their Newton, Iowa, headquarters have near-constant interaction with their partners on a host of continuing new operations issues. Product redesigns are transferred from the United States and used at remote manufacturing sites. Arrangements for cross-border materials flows require compliance with each country’s commerce regulations. Production and global transportation scheduling are coordinated with U.S. market demand so that outsourced products arrive in the right amounts and on time without tarnishing Maytag’s reputation for high quality. Although manufacturing operations are located remotely, they are closely integrated with the firm’s home-base activities. That tightness of integration demands on-site operations expertise on both sides of the outsourcing equation. Global communication technologies are essential. The result for outsourcers is a greater need of operations skills for integration among dispersed facilities.

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