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Chapter 10 Supply Chains To identify the key elements of international supply chains and the interrelationships, appreciating variations among sectors and environments To be able to evaluate supply chain strategies in action, from make-or-buy decisions to manufacturing and distribution options To appreciate the transformation in manufacturing brought about by the principles of lean production and continuous improvement To understand the increasingly important role of quality in all elements of the supply chain, including the impact of differing national environments To assess the development of transport and logistics in the context of consumer markets, as well as community and environmental impacts Evolution of supply chain management (SCM) • Internalization involves owning or controlling all the elements of a supply chain, as opposed to exchange transactions with many different organizations. • The value chain envisages a breakdown into different stages, which could be internal or with different firms. • The network involves potentially a number of suppliers and customers. • Information sharing leads to co-operative relationships, and helps firms to respond quickly to changing demand. The external supply chain Figure 10.1: The external supply chain Exchange transactions/ arm’s-length relations End consumer Distribution company/retailer Focal company Supplier What if we turn this pipeline upside down, i.e., end consumer is no longer at the end of the stream but at the beginning? This is precisely where modern management begins. Technology has overtaken us here, though, for the simple reason that internet allows all the parties to interact. Figure 10.2: Different types of supply chain Suppliers Manufacturers Distributors/ retailers End consumers Value chain Network Suppliers Manufacturers Distributors/ retailers End consumers Vertical integration Supply chain strategies • Supply chain strategies are guided by the needs of the end consumer, type of product and its phase in its life cycle. • Efficient supply chain – shifts high volumes of commoditylike products quickly and at the lowest cost (eg groceries) • Agile supply chain – aims to respond quickly to changing demand; short production life cycles (eg fashion clothing) • Lean supply chain – associated with lean manufacturing, as in car manufacturing; integrates design, sourcing and manufacturing; aims to be both agile and efficient Make or buy decisions • The firm must ask itself: What is best done by ourselves? If we buy from an outsider, what are we looking for in the supplier, and for how long? How would the outside provider fit in with other our other links to suppliers and customers? • Sourcing options depend on the firm's overall strategy – • It may seek internalization to keep control, outsource to an external provider, or choose an alliance approach. Make-or-buy decisions Figure 10.3: Make-or-buy decisions Make or buy decision Intra-firm • In-house Production • Production by foreign subsidiary Outsourcing (internal) (external) Sourcing options Inter-firm alliance • Evolution of close relations between supplier and customer Complex networks • Purchases from domestic independent supplier • Purchases from independent foreign supplier • Network of multiple global suppliers and customers Global sourcing strategies • Global sourcing is based mainly on cost savings. • Factors to take into account: • More challenging for complex products • Impact on core competencies • Longer and more costly transport • Regulatory frameworks, such as import restrictions • Exchange rate fluctuations • As firms interact with low-cost suppliers, adaptations of products may be made; quality levels should be equivalent to an in-house product. Figure 10.4: Global sourcing decisions Strategic goals • Proximity to markets • Cost savings Structure of relationship Global • Independent sourcing supplier • Long-term inter-firm links Choice of supplier • Specialist technology • Cost advantages Choice of the country • National environment • Cost structure • Infrastructure Global manufacturing strategy • Early mass manufacturing – exemplified by Ford; system of using assembly lines to produce standardized products was known as Fordism. • Fordist mass production was inflexible – switching to new product lines or even modifying existing ones was slow. • Based on production-push • Flexible mass production (mass customization) • Based on demand-pull • Ideas of Deming, but implemented by the Japanese • Aimed to produce a range of products and change to new ones with a minimum of disruption Figure 10.5: Fordist mass production compared to flexible mass production Fordist mass production Flexible mass production Processes Complex, rigid systems Flexible systems, cells, modules Inventory implications Just in case ― large stocks, infrequent deliveries Product diversity Low ― standardized products, difficult to change Just in time ― minimal stocks, supplier close to the customer High ― wide range of products, changes incorporated easily Semi-skilled workers, monotonous work, little involvement Multi-skilled workers, empowerment, teamworking, highly involved HR implications Flexible manufacturing • Manufacturing cells – Teams of workers dedicated to a specific product or component. • Lean production – System of production which aims to reduce waste, including time, and increase flexibility; pioneered by Toyota; used in conjunction with... • Just-in-time (JIT) system – Continuous flow of materials; low stocks needed; aided by close proximity of suppliers. • Modular manufacturing – Strategy based on designing and using a component in a number of different products. • Agile manufacturing – Ability to respond quickly to changing demand. Quality management • Quality – The degree to which a product or service meets the needs and expectations of customers. • Continuous improvement (kaizen) – Principle of striving constantly to resolve problems and improve processes. • Total quality management (TQM) – An approach to quality based on continuous improvement, which involves all staff and extends to supply chain. • Linked to overall business strategy • Implications for HR – Employee empowerment and investment in education and training Figure 10.6: Elements of total quality management Global logistics management • Logistics concerns the flow of materials and products in the supply chain, both ‘upstream’ and ‘downstream’. • Global logistics management aims for efficient integration of systems across national borders, and also customized solutions for customers. • Many logistics companies are now global (eg DHL). • Producer-retailer arrangements are now more integrated, due largely to the growth of large global retailers. • Enable retailers to hold reduced inventories, reduce distribution time, and eliminate paper transactions Global Transport • Transporting goods by sea was transformed by the container, which greatly reduced shipping costs. ...But port infrastructure in differing countries varies in capacity to take container ships. • Shipments of containers from China have prompted the growth in large container terminals, but there are imbalances between inbound and outbound containers. • Overland transport – Quality and extent depend largely on how developed the individual country is. Building transport infrastructure is a priority for developing countries, and any country which seeks to attract FDI. Figure 10.7: Breakdown of costs for goods imported into the US from China Source: Financial Times, 16 November 2004 Figure 10.8: Container trade at the Port of Long Beach Note: TEU = 20-foot equivalent units, the standard industry measure Source: Port of Long Beach, TEU Summaries, www.polb.com 10.1: Toyota (page 378) 1. Explain the key features of the Toyota Production System, stating the ways in which it was innovatory. Toyota initially used the assembly line system pioneered by Ford. This system was suitable for mass production of standardized products, but lacked flexibility. Toyota introduced lean production and continuous improvement systems. Lean production relies on just-in-time (JIT) delivery of components, and allows products of different specifications to built on the same assembly line. Continuous improvement involved staff becoming constantly alert to ways of improving processes and reducing waste. These innovations gave Toyota flexibility and reduced costs. 10.1: Toyota (page 378) 2. What have been the challenges faced by Toyota in developing a successful global strategy? • • • • Toyota was initially slow to expand manufacturing globally, as its system was firmly based in Japan, where the Japanese culture of co-operation and consensus-building underpinned lean production and continuous improvement techniques. Transplanting these techniques to different cultural environments was a challenge, and the techniques would need to be adapted. Lean production involves links with suppliers to be timed with precision. In Japan, suppliers were located near to factories. This would need to be replicated in foreign locations, adding to the complexities of setting up similar systems abroad. Toyota relies heavily on training to teach staff both techniques and culture of continuous improvement. This is difficult to replicate abroad. Training centres in Japan are used to train foreign staff. This is a costly and time-consuming process. Recalls of millions of cars have dented Toyota’s reputation for quality. It has had to build up global operations, but has faced challenges of maintaining high levels of quality in foreign plants. 10.1: Toyota (page 378) 3. Why does Toyota risk losing its competitive advantage as it expands globally? Toyota’s competitive advantage has been built on consistent levels of quality and value. It had difficulty maintaining levels of quality when its production system was adapted in foreign environments. Meanwhile, competitors have successfully introduced lean production and JIT systems. The adoption of this manufacturing model by other companies has eroded Toyota’s source of competitive advantage to some extent. The South Korean company, Hyundai, is an example, as it has gained a reputation for quality. Conclusions Supply chain management has evolved in both strategy and practice, to focus on networks and become more responsive to changing demand. Global sourcing enables firms to reduce costs and improve efficiency, but depends on the choice of location and supplier. Flexible mass manufacturing, including lean production and JIT systems, allows firms to adapt rapidly to customer needs. Quality management techniques have been combined with lean production to reduce both waste and costs. Logistics management can now be coordinated globally, but local factors remain critical in extended supply chains.