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Business Studies Notes 3
rd.
Year
Undergraduate / Graduate Level
SUBJECT: Supply Chain
Integration:
Implications of
Demand and Supply
Uncertainty.
Authors: (Original Study Notes and Lecture Notes prepared by Mr. K.P. Saluja (M.B.A. from Indian Institute of Management Ahmedabad), supported by Mr. K. K. Prasad (M.B.A from IGNOU Delhi) These notes are intended to be used by undergraduate students, completing Year 3 Business Degree Courses. These notes will help undergraduates and graduates complete case studies, coursework assignments and pass exams in Business Studies and Economics.
TABLE OF CONTENTS
(1) Supply chain management definition (2) Concept of integration (3) Forces Driving Increased Integration (4) Case Study: Dell Computer and Fujitsu America (5) Costs of Integration (6) Benefits of integration
Supply chain management definition
In this era of competition among supply chains, the outcome of an enterprise is progressively subject to the management's capacity to coordinate the organization's networks of business connections. Supply chain management has been characterized as the coordination of key business processes, from raw-material providers through end clients, which provide products, services, and information that add value for customers and other stakeholders (Lambert et al., 1998). Supply chain management makes use of a growing body of tools, techniques, and skills for coordinating and optimizing key processes, functions, and relationships, both within the OEM and among its suppliers and customers, to enable and capture opportunities for synergy. An OEM's competitive advantage is highly dependent on this integrated management function. Supply chain management attempts to combine the best of worlds, the scale and coordination of large companies with the low costs, flexibility, and creativity of small companies.
An integrated supply chain can be characterized as a relationship of clients and providers who, utilizing the executives’ methods, cooperate to improve their aggregate presentation in the creation, dissemination, and backing of a finished result. It very well might be useful to consider the members the divisions of a huge, in an upward direction coordinated organization, albeit the free organizations in the chain are bound together exclusively by trust, shared goals, and agreements went into on a wilful premise. In contrast to hostage providers (divisions of an enormous organization that commonly serve basically the parent company), free providers are frequently confronted with the clashing requests of different clients. All supply chains are incorporated somewhat. One target of expanding reconciliation is centering and organizing the significant assets of every member on the necessities of the inventory network to advance the general execution of the chain. The mix interactions requires the trained utilization of the management skills, cycles, and innovations to couple key capabilities and capacities of the chain and make the most of the accessible business open doors. Objectives regularly incorporate higher benefits and decreased takes a chance for all members. Traditional unmanaged (or minimally managed) supply chains are characterized by (1) adversarial relationships between customers and suppliers, including win-lose negotiations; (2) little regard for sharing benefits and risks; (3) short- term focus, with little concern for mutual long-term success; (4) primary emphasis on cost and delivery, with little concern for added value; (5) limited communications; and (6) little interaction between the OEM and suppliers more than one or two tiers away. Integrated supply chains tend to recognize that all parties should benefit from the relationship on a sustainable, long-term basis and are characterized by partnerships with extensive and open communications. A well-integrated system of independent participants can be visualized as a flock of red wing black birds flying over a marsh. Without any apparent signal, every bird in the flock climbs, dives, or turns at virtually the same instant. That is an integrated system! Supply chain members, in a similar
manner, must react coherently to changes in the business environment to remain competitive. Supply chain integration is a persistent cycle that can be streamlined just when OEMs, clients, and suppliers cooperate to work on their connections and when all members know about key exercises at all levels in the chain. First-level suppliers can assume a vital part in promoting integration by guiding and assisting lower tier suppliers. In an example of multi-tier integration, Wal-Mart thoroughly integrated P&G's Pampers product line into its supply chain. P&G, in turn, worked with 3M to integrate its production of adhesive strips with Pampers manufacturing facilities.
Forces Driving Increased Integration
The following worldwide trends and forces are driving supply chains toward increased integration: Increased cost competitiveness- Having substantially improved the efficiencies of internal operations, OEMs are seeking further cost reductions by improving efficiency and synergy within their supply chains. Shorter product life cycles- The Model-T Ford, for example, was competitive for many years. A personal computer (PC) is state of the art for less than a year, and the trend toward shorter product life cycles continues. Faster product development cycles- Companies must reduce the development cycle times of their products to remain competitive. Early introduction of a new product is often rewarded with a large market share and sufficient unit volumes to drive costs down rapidly. Globalization and customization of product offerings Customers the world over can increasingly afford and are demanding a greater variety of products that address their specific needs. Mass customization has become the new marketing mantra.
adequate supplies. Thus, abundant, timely information is used to work the front and back ends of the supply chain simultaneously. Speed is a critical factor in the computer industry, especially in the area of inventory. In the late 1980s, Dell measured component inventories in weeks. In 1998, they were measured in days. They may soon be further reduced through real-time deliveries so that, as components are used, they are automatically and immediately replaced. The reduction in inventory not only lowers requirements for capital, it also enables rapid changeovers to new product configurations because no old parts must be used up. Faster time to market for new products translates into increased revenues and profits. The change in emphasis from inventory levels to inventory velocity throughout the supply chain has been made possible, in part, by the Internet. In Dell's new virtual corporation, inventories are reduced by use of timely information; emphasis on physical assets is being replaced by emphasis on intellectual capabilities; and proprietary business knowledge is being increasingly shared in open, collaborative relationships. This extensive integration of the supply chain can be viewed as a shift from vertical corporate integration to a virtually integrated corporation (Magretta, 1998). Vertical integration was essential in the early years of computer manufacturing when the supplier base was not well established and assemblers had little choice but to design and build components and assemble the entire end product in house. Proprietary component technologies were a main source of competitive advantage, although in some cases they had little to do with creating value for the customer. As the industry matured, multitudes of component suppliers became eager to invest and compete in terms of price and innovation. Leveraging investments by these suppliers has freed Dell to focus on delivering complete solutions to its customers. However, because these components are available to all PC assemblers, it has become harder to compete in terms of end-product differentiation. Thus, a high premium has been placed on speed and process efficiency, blurring the traditional boundaries between supplier, manufacturer, and customer. For instance, peripherals, such as monitors, keyboards, speakers, and mice, need not be gathered in one location prior to
shipment to the customer. Manufactured by separate suppliers and labelled with the Dell logo, shippers gather them from all over North America, match them overnight (merge-in-transit), and deliver them as complete hardware sets to customers as if they had come from the same location. Dell's virtual integration has the following characteristics: Use of rapid, seamless communication to build direct relationships between customers, OEM, and suppliers A clear definition of what Dell does best (i.e., core competencies, including branding, marketing, and selling through direct channels), with partnerships for the rest (capital-intensive and labor-intensive component fabrication processes and services). This enables Dell to be highly selective in its capital investments and to focus on activities that create the most value for customers and shareholders Selection of partners who are best in their respective fields, inviting them to become intimate parts of the business, and holding them to the same exacting quality and performance standards as in-house segments of the business Use of a minimum number of suppliers, to whom Dell is highly loyal as long as they maintain their leadership in technology, quality, cost, and delivery Use of the Internet, not just as an add-on to the business, but as an integral part of a strategy to eliminate boundaries between companies and promote effective integration Less emphasis on guarding intellectual assets and more emphasis on using assets rapidly before they become technologically obsolete By using a highly integrated supply chain, Dell has enjoyed many of the advantages of vertical integration while simultaneously benefiting from the investments, innovation, efficiencies, and specialization of highly focused
Time devoted to managing, training, and support Effort devoted to becoming a better customer Investment in supply chain integration software and compatible information systems throughout the chain Opportunity costs (i.e., investments in supply chain integration may necessitate foregoing other business opportunities) Risks of production stoppages Since the degree of interconnectedness and reliance makes profoundly incorporated affixes progressively defenceless against disturbances, the gamble of creation stoppages ought not to be neglected. A profoundly coordinated, related production network that comprises fundamentally of sole-source providers rehearsing in the nick of time fabricating with negligible inventories is exceptionally dependent on the ideal conveyance of value parts and administrations. Disappointment by one member to convey can quickly stop different pieces of the chain. This occurs, every so often, even to the best suppliers and logistics providers. Automakers, for example, who are under constant pressure to reduce costs, have tightened their supply chains to the point that they typically have less than a one-day supply of parts at final assembly facilities Thus, a breakdown anywhere in the supply chain has the potential of bringing production to a halt (e.g., strikes at two GM parts plants in 1998 resulted in the shutdown of virtually all assembly operations within days, and flooding in 1999 at a single supplier in North Carolina reduced operations at seven DaimlerChrysler and three GM assembly plants to half-shifts due to shortages of a single part). Possible threats, including storms, blackouts, psychological oppression, PC programmers, disturbances in correspondences, and equipment breakdowns, can be truly challenging to anticipate and exorbitant to get ready for. In
another model, the seismic tremor that shook Taiwan in September 1999 showed how a power supply disturbance in one nation can have overall resonations through a whole industry. Harm to two electric power substations was the essential driver of a closure of Taiwan's microprocessor industry, which brought about deficiencies of parts and greater expenses in the stock chains of OEMs all over the globe. Supply chain members should exclusively and aggregately evaluate the likelihood of production-stopping events and their capacity to bear risk, which should be adjusted against the investment funds from expanded sole-sourcing, tighter incorporation with residual providers, and diminished inventories and creation limits. Hence, albeit great correspondences and asset sharing can be useful in getting ready for and answering disturbances, supply chain, participants must be careful to avoid unacceptable levels of risk in their zeal for integration.
Benefits of integration
The most pursued advantage, or profit from speculation, in store network coordination is the expense reserve funds that outcome from decreases in stock. Inventories can be decreased by speeding up at which materials travel through the inventory network and by lessening wellbeing stocks. For instance, if the expenses of keeping up with stock are around 1% each month and assuming a coordinated store network can decrease stock levels by 30%, the investment funds, divided between the members, can be significant. Another common benefit of supply chain integration is a reduction in transaction costs. If information sharing can reduce the number of transactions and if electronic systems can reduce the cost of each transaction from the $ cost of a traditional transaction, each participant can realize substantial savings (LaLonde, 1997). Decreases in supplier redundancy s can lessen item costs by increasing production levels at residual providers and diminishing the expenses of dealing
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