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Supply Chain Strategies

Bruce O. BartschenfeldUniversity of Indianapolis

Bruce O. Bartschenfeld is currently a full-time undergraduate in BusinessAdministration at the University of Indianapolis, Indianapolis, Indiana.

4241 Bluff RoadIndianapolis, IN 46217

(317) 786-8462

.I.Supply Chain Strategies I

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Supply chain strategies are one of the most important aspects of supply

chain management. The success of any business as a whole relies on the

specific techniques executed to manage costs. Purchasing materials is a large

part of managing costs. Two of the major issues in purchasing are: selecting the

right supplier and finding the correct purchasing strategy in hiring suppliers.

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The key to success of an organization is the supply chain strategy. (12) I

"The supply chain is made up of two essential elements: strategic sourcing and ~

strategic logistics." (12, pg.1) The supply chain makes up 55-85% of total costs

for a business, so it is understandable why so many people are searching for

newer and better strategies. Innovative strategies can drastically improve the

profitability of that organization. On the other hand, bad strategies can lead to

the demise of a business. Building a competitive advantage is important to

getting one step ahead of the competition. (13)

As the information age soars into the new 21st Century, the logistics of a

corporation are greatly affected by the technology that is employed. (10)

Business is more competitive than ever with the popularity of the Internet rising at

a feverish pace. Many companies are finding out that they must share

information electronically, or else they not be able to stay competitive with their

rivals. (11)

Another popular strategy is a just-in-time system. This means keeping

inventory as low as possible and cutting process times down to a minimum. With

careful planning in the warehouse, improvements can be made any number of

innovative ways. "Real improvement comes from making a change in the way

business gets done from a process standpoint, an operational standpoint, and a

supply chain structure perspective.

Many purchasing strategies lead to a competitive advantage in supply

chain management. These strategies are: many suppliers, few suppliers, virtual

companies, and vertical integration. If employed correctly, each of the strategies

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.I.can be a large asset. "Adoption of supply chain strategies could be a significant ~

determinant of profitability for companies in the future." (3, pg.204) ~

PURCHASING STRATEGIES

Purchasing strategies are the most difficult, and maybe, the most critical

aspect of the supply chain. (4) Relationships with suppliers can be a touchy area

for management. Some companies are reluctant to tell suppliers too much

information. They fear the information will be relayed to competitors or their

suppliers may eventually become the competition. Also, companies and

suppliers are each trying to get the best deal for their respective companies.

Many companies are starting to establish closer relationships with suppliers. It is

important to figure out what is going on inside the business of suppliers to make

sure the supplier is operating smoothly. Other companies treat suppliers as their

enemies, and in effect, they feel the supplier must not be trusted. (4) Another

strategy is to produce products within the company. This usually involves the

buying out of a supplier. (5) Virtual companies are organizations who hire

suppliers on an as needed basis.

Each of these strategies is very different in nature, but the most important

aspect is how a company goes about implementing the strategy. (9) When

executed effectively, the purchasing strategy can provide a competitive

advantage. If the strategy is not given the proper attention, it can be extremely

costly to the company and the success of the company as a whole.

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.Few Suppliers

According to Jay Heizer and Barry Render, "A strategy of few suppliers ~

implies that rather than looking for short-term attributes, such as low cost, a

buyer is better off forming a long-term relationship with a few dedicated suppliers.

(5, pg.421) Although looking to drive costs down seems to be a great short-term

plan, it has not always led to the best quality or best service to the customer. (1)

The few suppliers strategy has many advantages. First of all, a company

can build trust in the supplier, and the supplier also has a chance to build trust in

the company being supplied. A Company must trust the supplier enough to

create a close relationship with them. (4) This type of partnership requires a

company to share exclusive information about the company. This ensures that

the supplier is comfortable with the stability of the business. "Companies that

routinely swap information and ideas with suppliers create an environment for

joint achievement." (12, pg.7) In this type of relationship, the supplier puts much

of its success in the hands of the company it is supplying. If the company the

supplier is working for performs poorly, the supplier will also struggle in business.

Supply chain strategies are not only limited to factories or manufacturing,

either. The mining industry has determined that it needs to implement new

supply chain strategies. The industry cannot survive under its current conditions.

They are spending too much money on non value-added expenses, and mining

companies are not using the most efficient practices within their supply chain.

Mining companies must find the most competent suppliers and build a close

relationship with them. Mining equipment is extremely expensive, while the

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.safety of the equipment is also a major concern for the company. Many mining

companies have admitted that they believe almost half of their suppliers are

inadequate and others have over 1,000 suppliers. (3) The companies need to

take control of their dying industry. They need to study suppliers and find out

which ones are or are not performing up to standards. It is time that the

companies stop allowing suppliers to freeload off the industry of mining. (3)

Another benefit is that the few suppliers approach supports just-in-time

systems. The supplier is available on shorter notice if it is already under

contract. This works effectively for just-in-time systems. The supplier may

relocate to a warehouse closer to the larger company, and therefore inventory is

kept to a minimum and deliveries are made in smaller lots.

Some challenges also come along with a few suppliers approach. The

supplier has an opportunity to take advantage of the company. They may drive

prices up because they are already under contract for an extended period of

time. The company is vulnerable to losing valuable information, since suppliers

have been exposed to inside information. Nothing is stopping suppliers from

relaying information to others, including the competition. It may be a necessity to

sign an agreement with the supplier that all information shared is confidential,

and any breech of contract is considered illegal. (9) Another disadvantage is

meeting future needs of the company. Companies must carefully examine the

capacity of the supplier. (1) If the supplier cannot meet all of the capacity

requirements of a company, then the company will have to limit production.

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.The few suppliers approach is becoming very popular in the business ~

world. It has provided a major boost for many companies that have been close

to bankruptcy. Xerox and Minolta were both about to go out of business when

they decided to reduce the number of suppliers. (9) The strategy revived both

companies and they are now leaders of their respective industries.

Many Suppliers

A popular and widely used approach to purchasing is the many suppliers

strategy. 'With the many supplier strategy, the supplier responds to the

demands and specifications of a 'request for quotation,' with the order usually

going to the lowest bidder." (5, pg.420) This requires companies to form an

adversarial relationship with suppliers. There is little trust between the company

and its suppliers in this strategy.

"Supply chain strategies must exploit global resources. The management

of these resources requires new methods in order to collaborate with, and

maximize the results of, each of the participants outsourced around the planet."

(11, pg.35) Numerous suppliers allow companies to explore suppliers all around

the world. This will ensure that the lowest priced supplier will be employed.

Suppliers will maintain a fair price because they know they are in competition

with other possible suppliers. It also increases the level of service from suppliers

because they must do everything possible to get the business of a company.

This strategy also works extremely well in case one supplier goes out of

business or changes its line of business. When there is no relationship with the

supplier, a company can move along with business if something happens to the

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I.current supplier. If a supplier raises prices, a company can easily shift business ,

to a more competitively priced supplier.

Companies are able to keep important information within the company in

the many suppliers approach. No information is shared with suppliers because

they are not considered a part of the organization. In fact, suppliers are almost

an enemy for the company.

On the other hand, a company is not able to gain much information about

suppliers, either. The reliability of suppliers may also be in question. "An

undependable source of parts can cripple a plant, leading to inflated lead times,

and resulting in problems across the supply chain, all the way to the final

customer." (4, pg.1 0)

The many suppliers approach does not support a just-in-time system.

Deliveries are made in large lots. Since suppliers are not available on demand, a

company must deal with inventory and deliveries that are not as frequent as in a

few suppliers approach. Marks and Spencer, a British textile manufacturer, is

leaving the many suppliers approach because of a 43% decline in profits over the

past year. This is attributed to slow reaction to customer's needs. With a few

suppliers approach, Marks and Spencer can find out what the customer wants

and get it to them more efficiently. The new suppliers will deliver products three

times more often than before, which gives Marks and Spencer more time to get

the newest styles shipped to the factory. (8)

The many suppliers approach seems to be a strategy of the past. Most

companies still use this strategy, but they are in the process of integrating a more

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innovative approach to business. Companies are finding that they can save

money by reducing the number of suppliers and maintaining a relationship with

the supplier.

Vertical Integration

"Vertical integration is developing the ability to produce goods or services

previously purchased or actually buying a supplier or distributor." (5, pg.422) This

occurs when a company actually purchases its supplier. The integration of a new

set of operations is a major acquisition at a company. All members of the

executive team have to be informed of the developments. It is considered a new

and extremely risky investment for an organization.

Vertical integration can offer an opportunity for a company to lower its

overall costs. Producing a product within the company eliminates a member of

the supply chain. Fewer members in the supply chain ultimately leads to better

margins for the company. When dealing with a supplier, the company must pay

for the supplier to cover its costs and maintain a positive profit. This is a great

opportunity when the company has the necessary capital to incur the costs of

production. When a company produces the product within the company, they do

not have to pay the premium associated with buying it from an outside source.

Costs are high for production in the short-term, but this approach will save the

company money in the long-term.

Vertical Integration goes on in the entertainment industry as well as in

manufacturing. Disney has bought ABC and Viacom bought CBS. The two

companies used to sell programming to the networks and would only receive

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payment for the initial rights to the show. These are attempts to gain a larger .

platform to sell and advertise their own products. Disney airs its shows and has

many commercials for Disney World. Both acquisitions have been profitable so

far. (7) Instead of letting the television networks make the majority of the profits

on Disney and Viacom programming, the two companies now make more money

by airing their own shows.

Vertical integration requires a company to take on extra responsibility. If

management does not have the expertise to run new operations, they will

eventually fail. A higher degree of risk is also involved with gaining a new

department. The amount of capital tied up in internal expense increases greatly.

Also, extra costs are incurred. A company could take on more operations than

they are able to afford. Integration may seem like a good idea, but management

could get overzealous in the estimation of existing capital available for new

ventures.

Vertical integration carries with it major risks. Many companies have

bought out suppliers or began to produce their own materials. Often times the.

company has underestimated the costs of making such a large purchase or

acquisition. The plan must be well thought out, and financial risks must be

considered. Companies need to have enough money to back up the venture

should it fail.

Virtual Company

"Virtual companies rely on a variety of supplier relationships to provide

services on demand. Virtual companies have fluid, moving organizational

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."boundaries that allow them to create a unique enterprise to meet changing

market demands." (5, pg.424) In this strategy, a company forms a network with

other companies. All companies are dependent upon one another. Each

member of the network performs essential functions to the project. Technology

systems and financial services are major contributors to the network.

Virtual companies work well in situations of short-term projects of a

company. They do not want to fully integrate new operations for just one project.

This cost is not worth it for the company because they use many different

operations depending on the particular project. IBM Corporation and EXE

Technologies, Inc. have teamed to develop software that will help automotive

and packaged goods companies. The software provides links to consulting

services, technology, and integration skills. (2) Information technology is a major

cost for a business. (10) Many companies are not ready to take on all of these

costs.

Much of the success of a company lies in the hands of outside companies.

If another company does not fulfill its responsibilities, all members of the network

fail. It is not only the lagging company that suffers. Also, many extra costs are

incurred by hiring other companies to perform major operations. This, in turn,

lowers the profitability of the company.

Virtual companies are a great idea for smaller organizations. The small

companies do not have the resources to purchase all of the manpower and

materials necessary for a short-term project. Merging with other companies for a

particular project provides a company the needed resources to complete the

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project without the financial burden of creating and spending capital on all of the .

departments.

CONCLUSION

Many supply chain strategies can be effective for a company. The key to

finding the best strategy for a particular company is to put full effort toward the

project. If only partial attention is given to a new strategy, it will most surely end

up in failure. New strategies that are given the proper attention can provide new

life for a company and its success. All of the strategies that have been

mentioned in the paper can be successful under the correct circumstances. It is

up to the individual to find the strategy that will be most effective for his or her

organization.

Supply chain strategies could be the most important aspect of the

corporate world today. Most people are aware that it takes a great deal of effort

to get ahead in the business world. That is not to say it can not happen.

Managers and supervisors with innovative new strategies can send their

company straight to the top. It is also the responsibility of the leader of the

project to sell other members of the company on the supply chain strategy. No

one employee can single-handedly implement an entirely new strategy. It takes

a team effort. Each and every employee must believe that the new strategy will

work more efficiency than anything the company has ever seen before.

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REFERENCES

1. Arnold, J.R. Tony, Lloyd M. Clive, and Henry Alex Hutchins. APICS

Basics of Supply Chain Management. MGI Management Institute, Inc.,

West Plains, NY, 1997.

2. Electronic Buyers' News. "IBM, EXE Offer E-biz Solutions," 11

November 1999, Issue 1187, 70.

3. Gattorna, John. "Supply Chain Management," Mining Magazine. April

1999, p. 204.

4. Handfield, Robert B. and Ernest L Nichols, Jr. Introduction to Supply

Chain Management, Prentice Hall, Inc., Upper Saddle River, NJ, 1999.

5. Heizer, Jay and Barry Render. Principles of Operations Management,

3rd Edition, Prentice Hall, Inc., Upper Saddle River, NJ, 1999.

6. Hicks, Donald A. "The State of the Supply Chain Strategy," liE Solutions,

Vol. 31, No.8, August 1999, p. 24-29.

7. Lubove, Seth. "Conspiracy Theory," Forbes. Vol. 164 Issue 13,

November 1999, p. 52-53.

8. Marks and Spencer. "Black Marks," The Economist, Vol 353 Issue 8144,

6 November 1999, p.66-68.

9. Preston, Robert. "Supply Chains Render More than Cost Savings,"

InternetWeek. Issue 790, 22 November 1999. p. 7-8.

10. www.mchugh.com. "Les Central," Nov 1999. Lexis-Nexis.

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,11. Rodin, Robert. "Supply Chain Strategies Must Exploit Global Resources,"

Electronic News. Vol. 44, 11 May 1998. p. 35. .

12. www.sourcing.com. "The Supply Chain," 2 Nov 1999. FirstSearch.

13. liE Solutions. "Control of the Supply Chain is Lifting," Vol. 31, No.7, July

1999, 7.

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