Operations Management / Supply Chain Management

Module 09.01 Key Concept: Supply Chain Sourcing Strategies

The supply chain is a complex linkage of different suppliers and internal or external customers.

It is important to understand that the weakest link in any supply chain determines the actual performance of the entire chain.  This highlights the importance of communication, collaboration and operations excellence throughout the Supply Chain.    In addition, Supply Chain Strategy must be aligned with each company’s overall corporate strategy and marketing approach.  This takes us back to an earlier Module when we discussed the elements of Product and Service Design.

There are many different sourcing strategies available for any business regardless if they are producing products or services.   Products and / or services can be made / produced in-house; purchased for resale or outsourced (sub-contracting / toll manufacturing).   The basic choice is between obtaining products and services externally as opposed to producing them internally.  With Outsourcing traditional internal activities and resources are transferred to outside vendors.  This is usually done because of the need for efficiency in specialization.  It also enables the firm to focus on its own core competencies.  There are six basic sourcing strategies presented in the text:

  • Many suppliers
  • Few suppliers
  • Vertical integration
  • Joint ventures
  • Keiretsu networks
  • Virtual companies

Many Supplier Strategy: Is commonly used for commodity products. Purchasing is typically based on price and suppliers compete with one another.  The supplier is responsible for technology, expertise, forecasting, cost, quality, and delivery.

Few Supplier Strategy:  The Buyer forms longer term relationships with fewer suppliers.  This creates value through economies of scale and learning curve improvements.  In general, Suppliers are more willing to participate in JIT programs and contribute design and technological expertise.  There are pertinent disadvantages.   The cost of changing suppliers is huge and Trade secrets and other alliances may be at risk.

Vertical Integration:  Pertains to developing the ability to produce goods or service previously purchased.   Integration may be forward, towards the customer, or backward, towards suppliers.  This strategy can improve cost, quality, and inventory but requires capital, managerial skills, and demand.  However, it can be risky in industries with rapid technological change.

Joint Ventures: Represent arrangements with formal collaboration.   Such an arrangement may provide enhance skills, provide a secure source of supply and / or reduce costs, etc.  A major challenge is to establish cooperation without diluting brand or conceding competitive advantage.

Keiretsu Networks: Establish a middle ground between few suppliers and vertical integration.  In this case the supplier becomes part of the company coalition.  The coalition often provides financial support for suppliers through ownership or loans.  Members expect long-term relationships and provide technical expertise and stable deliveries.  This type of operation may extend through several levels of the supply chain.

Virtual Companies: Rely on a variety of supplier relationships to provide services on demand.  They represent fluid organizational boundaries that allow the creation of unique enterprises to meet changing market demands.  Relationships may be short- or long-term.  These relationships often result in exceptionally lean performance, low capital investment, flexibility, and speed.

There are inherent risks with any selected supply chain / supplier strategy selected.  Therefore, Risk Management is a very important function in any organization / business.  Risk Management includes the assessment of potential risks as well as the establishment of practical actions to prevent the risk from happening or mitigation strategies to minimize the negative impact.  This should result in flexible, secure supply chains.  A diversified supplier base is often used to mitigate the risk of supply chain delivery disruptions.

Security (or lack of) represents a very dangerous and ever increasing concern in the supply chain – especially in companies that are pushing for Lean / Just-in-Time processes.  Shipments can get mis-routed, stolen, damaged, or excessively delayed.  This can cause major disruptions in production of products or services.  There are ways to mitigate these risks.  Technological innovations are improving security and inventory management.  Tracking can help expedite shipments.