Agenda

• Understanding Supply Network

Supply Network Strategy • Supply Network perspectives
• Outsourcing decision: vertical Integration
• Traditional market-based supply
• Partnership supply
• Network behavior (supply chain dynamics)

Supply network issues Supply networks are the interconnections of relationships

between operations
Flow of Products/Services
Supply network strategy Flow of Information
Upstream Focal Downstream
The concept of level
supply networks Second-tier
suppliers
First-tier First-tier Second-tier
suppliers customers customers

Supply Supply network

network behavior Company A
relationships

The network
Vertical Partnerships Market perspective
integration trading Company B

Network Network
dynamics management Company C x
x
x
Quantitative Co-ordination
Qualitative Differentiation
Reconfiguration x x

Supply side of the network Demand side of the network

1
 Operations performance should be seen Supply network view enhances understanding of competitive
as a whole supply chain issue and cooperative forces

The value net

Competitors

Benefits of looking at the whole supply chain

Shifts emphasis to the long term Suppliers Focal Customers

company
Sensitizes the operation to macro changes
Changes the nature of the ‘supplier–buyer’ relationship
to ‘operations-to-operations’ relationship
Puts the operation into its competitive context and helps identify
the key players (see next slide) Complementors

The market resource dimensions of Supply Network Types of supply relationship

suppliers
– few
Close

Long-term
virtual Vertical
Extent of activity Nature of activity operation integration
‘Partnership’
(Quantitative) (Qualitative)
supply
Type of inter-firm contact

relationships

Posture
Structure
Market Relationships Closeness of
No. of relationships
relationships Traditional
market
Virtual supply
Transaction

Degree of activity Importance of activity spot

al – many
suppliers

Resource Scope trading

Performed ‘in-house’ Performed ‘in-house’
Resource scope
The character of internal operations activity
Do nothing Do everything

2
 Pros-Cons of vertical integration
1. Vertical integration decisions

(+)
dependable supply
Exclusive balance
between stages
Non-exclusive balance
between stages
May reduce cost
May improve quality
Helps understanding other activities
Backward Forward
integration integration

Focal (-)
operation
Internal monopoly
Loss of flexibility
Extent of integration
Cuts off from innovation
Distracts from core activities

2. Traditional Market based supply

The decision logic of outsourcing

•At opposite end of vertical integration is the use of

Does Is significant market trading.
Is activity
company Is company’s operations
of strategic No Explore
importance
have No
performance No performance No •Bought-in products constitute a substantial part of costs
outsourcing
?
specialised superior improvement
this activity in most organisations. Small % price saving may result in
knowledge likely
? huge benefit on bottom-line of company
? ?

Yes Yes
Yes Yes Yes (-) Drawbacks
•Buyer-supplier uncertainties (e.g. market, need
uncertainties)
Explore keeping this activity in-house •Strategic risk
•Transaction costs

3
 When is the use of pure market mechanisms 3. Partnership Supply
appropriate in buyer–supplier relationships? Partnership relationships are seen as desirable because
they can reduce the transaction costs of doing business
Many

Market Attitudes
mechanisms Leverage
Trust
appropriate market
uncertainty
Number of supply alternatives

Long-term Sharing
expectations success

Joint Multiple
learning points of
contact
Leverage Closeness of
needs Market relationship
uncertainty mechanisms Joint co- Few
inappropriate ordination of relationships
activities

Resource dimension Joint problem Information

Few

Low Cost of changing suppliers solving transparency

High
Dedicated
assets Actions

Elements of process partnership relationships

Trust The “prisoner’s dilemma” decision (Continued)

Assume Mr. Orange confesses
There are strong forces acting against the maintenance of trust
Mr.
The “prisoner’s dilemma” decision Confesses Orange Doesn’t confess
Mr.
Confesses Orange Doesn’t confess
Mr. White gets 5 yrs Mr. White goes free
Confesses
Mr. Orange gets 5 yrs Mr. Orange gets 10 yrs
Mr. White gets 5 yrs Mr. White goes free
Confesses

Mr. Orange gets 5 yrs Mr. Orange gets 10 yrs Mr. White

Mr. White Mr. White gets 10 yrs Mr. White gets 3 yrs
Doesn’t confess
Mr. Orange goes free Mr. Orange gets 3 yrs
Doesn’t confess

Mr. White get 10 yrs Mr. White gets 3 yrs

Mr. Orange goes free Mr. Orange gets 3 yrs

4
 The “prisoner’s dilemma” decision (Continued) Degrees of trust
Assume Mr. Orange doesn’t confess Calculative Based on
…trusting you is likely to
Mr. trust knowledge
give me more benefits
Confesses Orange Doesn’t confess
than not trusting you...

Cumulative positive
Mr. White gets 5 yrs Mr. White goes free …I believe I can trust you
Confesses
because I think I know

experiences
Mr. Orange gets 5 yrs Mr. Orange gets 10 yrs Cognitive
you enough to be
trust
confident you will behave
Mr. White as I would wish...

Mr. White gets10 yrs
Doesn’t confess
Mr. Orange goes free
Mr. White gets 3 yrs
Mr. Orange gets 3 yrs
…I trust you because I
know that you know that I
Bonding wouldn’t let you down and
Based on
trust you know that I know that feelings
you wouldn’t either......

Some factors influencing the nature of

network relationships Network Behaviour
Economies of Market (Supply chain dynamics)
scale position

Transaction Market
costs risks
1. Quantitative dynamics (‘Hard’ supply
OPERATIONS
Nature of
network
MARKET dynamics)
RESOURCES REQUIREMENTS
relationship
Look for the causes of overreaction to
volume changes
Learning Market
potential structure

Resource Competitive 2. Qualitative dynamics (‘Soft’ supply

dynamics)
deficiencies behaviour

Look for the perception gaps

5
 Quantitative (‘Hard’ supply dynamics) Qualitative (‘Soft’ supply dynamics)
Note - All operations keep one period’s inventory Market requirements
Original [Market [Market
Third-tier Second-tier First-tier perception] Supply choice
equipment Gap? perception]
supplier supplier supplier manufacturer Linked? Gap?
What A What B What B What C
Prodn. Stock Prodn. Stock Prodn. Stock Prodn. Stock thinks B thinks it thinks C thinks it
100 100 100 100 wants wants wants wants
1 100 100 100 100 100
100 100 100 100
2 100 100 100 100 [Supplier
20 60 80 90 95 [Operations Gap?
60 80 90 95 improvement]
improvement]
3 180
60
120
120
80
100
100
90
95
95
95
95
95 Operation A Operation B Operation C
Gap? Gap?
95 [Supplier Gap?
4 120 100 95
60 90 95 95 95 improvement]
90 95 95 95
5 90 95 95 95
100 95 95 95 95
95 95 95 95 How A How B How B How C
6 95
95
95
95
95
95
95
95 95 thinks it is thinks A is thinks it is thinks B is
95 95 95 95 performing Gap? performing Linked? performing
Gap? performing
Orders Orders Orders Orders [Operations Supply [Operations
3 2 1 OEM MARKET development
Items Items Items Items performance] performance]

Fluctuations of production levels along supply chain in response to small change in end-customer Operations performance
demand

Supply chain instability (put together Managing Supply chain dynamics

quantitative and qualitative dynamics)

1. Coordination
Information sharing
Manufacturer’s Wholesaler’s
orders to Store’s orders Sales from
orders to its
to wholesaler store
Channel alignment
suppliers manufacturer

Operational efficiency

2. Differentiation
0 0 0 0
Time Time
Time Time Time

Manuf- Whole - Retail Supply chains with different end objectives

need to be managed in different ways
Supplier Consumers
acturer saler store

3. Reconfiguration
Four major causes for above:
1. Demand forecast updating 2. Order batching Changing the scope and shape of supply chain
3. Price fluctuation 4. Rationing and shortage gaming

6
Differentiation Differentiation
Depot

Match supply chain characteristics to the nature of demand

Information
Products
Nature of Demand
FUNCTIONAL PRODUCTS INNOVATIVE PRODUCTS
Supplier Manufacturer Predictable Unpredictable
Few changes Many changes
Low variety High variety
Customer responsive supply Price stable Price markdowns
Depot
Long lead-time Short lead time
Low margin High margin
Outlets

Depot

EFFICIENT
Match Mismatch

Supply chain objectives

Products
Information
Supplier Manufacturer
Efficient, fast, throughput supply

RESPONSIVE
Depot
Mismatch Match
Outlets
(by M. Fisher)