Supply Chain

3 March 2017

A real world example of a second-tier supplier is “Wisconsin Aluminium” which supplies aluminium fuel filter housing to Mechanical Devices Company. Mechanical Devices uses the fuel filter housing on an engine component that they produce for Caterpillar Inc. Therefore, Wisconsin Aluminium is a second-tier supplier. b). Second Tier customer: The first tier’s customer’s customer is the focal firm’s second tier customer. Second tier customers buy from first tier customers (who now become a re-seller).

The second tier customer may or may not be the end user of the product or service. A real world example of a second tier customer could be a retailer like Superstore where they would purchase the groceries from their first tier customers (wholesalers) and they would become the end user’s retailer. c). A focal firm: A focal firm is “the initiator of an International business transaction, they conceive, design, and produce the offerings, (goods and services) intended for consumption”.

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Note 1. A real world example of a focal firm would be VW.

Basically, there are many firms that help in the making of the VW, a different firm may assemble the car, and another one may provide the means of distribution, but the focal firm is still VW, as it “their car”. Q1-2). Is the use of a large number of suppliers a good idea? Why or why not? Support your answer with real business examples. It all depends on the nature of the industry as to how many suppliers would be needed, however, a few good suppliers is what organizations should aim for. This is because the key to developing effective chain management programs is keeping the customer in mind.

When individual firms in a supply chain make business decisions while ignoring the interests of the end customer, and the other chain members, these suboptimal decisions transfer risks, costs and additional waiting time along the supply chain, ultimately leading to higher end-product prices, lower supply chain service levels and eventually lower end-customer demand. Firms should have few good suppliers that they can manage successfully. Building successful, trusting relationships with all the top-performing suppliers is a key ingredient of an effective supplier management effort.

These few good suppliers can then provide tremendous benefits to the buying firm and the entire supply chain. Higher purchase volumes per supplier typically mean lower per unit purchase costs, and in many cases, higher quality and better delivery service. These important characteristics of few good suppliers are strategically important to the firm because of their impact on the firm’s competitiveness. A real world example of a good supplier is Imperial Oil who provides gasoline to their retailers. Q1-3).

Why do companies practice supply chain management instead of buying out their suppliers and industrial customers forming conglomerates? The reason why firms are practicing supply chain management is because they want to be able to focus more on core capabilities, while trying to create alliances, or strategic partnerships with suppliers, transportation and warehousing companies, distributors and other customers who are good at what they can do best. This collaborative approach to making and distributing products and services to customers is becoming the most effective and efficient way for firms to stay successful.

Especially for firms with large system inventories, many suppliers, complex product assemblies, and highly valued customers with large purchasing budgets, these have the most to gain by practising good supply management techniques. For these firms, even moderate supply chain management success can mean lower purchasing and inventory costs, better product quality and higher levels of customer service—all leading to more sales. Q1-4). Explain how the emergence of the concepts of JIT (Just in Time) and TQM (Total Quality Management) in the 1980’s contributed to the development of supply chain management.

In the 1980’s, intense global competition began and manufacturers utilized JIT and TQM strategies to improve quality, manufacturing efficiency and delivery times. JIT is a lean-production system and it results in faster delivery times, lower inventory levels and better product quality. The supply chains had to be developed because an important aspect of a lean system is the quality of incoming purchased items and the quality of the various assemblies as they move through the production processes. This is due to the characteristically low levels of inventory purchased and work in process in lean-oriented facilities.

Thus, firms employing concepts of lean usually have a TQM strategy in place to ensure continued quality compliance among suppliers with internal production facilities. So there was a real need of a good internal control system and chain management processes to be developed and that is how supply chain management got designed. And every supply chain design management is different from the other even if they practice JIT and TQM, depending on where they will construct their distribution centres, what transportation modes they will use, how big they want their production facilities and warehouses.

The bottom line is was that if a company wanted faster delivery times, lower their inventory levels, and still give the customers the best product quality, they needed to work in a supply chain setting in collaboration with other tiers to gain a competitive advantage in the industry. And this all has been possible because of new technology as well as the emergence of the internet. Q2-1). Briefly summarize HBR (1997) article “What is the right supply chain for your product? ” by Marshall Fisher.

Although there has never been so much technology and brain power applied to improving supply chain performance, the actual performance of many supply chains has never been worse. In some cases, costs have risen to new levels because of adversarial relations between supply chain partners as well as dysfunctional industry practices. The new ideas and technologies have not worked because companies lack a framework for deciding which ones are best for their particular situation. A framework is provided to managers for helping them understand the nature of the demand for their products and devise the supply chain that can best satisfy that demand.

Once products have been classified on the basis of their demand patterns, they fall into one of two categories: they are either primarily functional or primarily innovative. The root cause of the problems plaguing many supply chains is a mismatch between the type of product and the type of supply chain. Fisher states that products generally fall into two categories-innovative and functional-each requiring fundamentally different processes and goals. The first step to creating efficiency comes from assessing the supply chain and deciding which of the two product categories is following through it.

This step is critical, in that innovative and functional products call for significantly different approaches to supply chain management. If products are functional, for example toothpaste, businesses should follow time-tested business models for identifying and trimming excess from different points along the supply chain. If, on the other hand, products are innovative, businesses should create a responsive supply chain to control the unpredictable nature of demand for example Louis Vuotton handbags. Q2-2).

Explain the role of physical costs and market mediation costs according to Fisher’s article as they relate to different supply chain structures. Provide at least three examples each of physical costs and market mediation costs. Supply chains perform two distinct types of functions: a physical function and a market mediation function. A supply chain’s physical function is readily apparent and includes converting raw materials into parts, components, and eventually finished goods, and transporting all of them from one point in the supply chain to the next.

Less visible but equally important is market mediation, whose purpose is ensuring that the variety of products reaching the marketplace matches what consumers want to buy. Each of the two functions incurs different costs. Physical costs are costs of production, costs of transportation and costs of inventory storage. Market mediation costs arise when supply exceeds demand and a products has to be marked down and sold at a loss or when supply falls short of demand, resulting in lost sales opportunities and dissatisfied customers.

Market mediation costs can be costs of shortages, costs of obsolescence, and costs of holding excessive supplies. Q2-3). Provide at least two “real-industry” examples of product-supply chain mismatch which are out of the “strategic fit zones”. Clearly explain why and how they are out of “strategic fit”. Two “real-industry” examples of product selling supply chain mismatches are the automobile industry and the computer industry, as per Fisher’s paper. In the automobile industry for example, there are some cars such as the Ford Fairmont, which are inherently functional, while others, such as the BMW Z3 roadster, are innovative.

A lean, efficient distribution channel is correct for functional cars but not appropriate for innovative cars, which requires inventory buffers to absorb uncertainty in demand. The most efficient place to put buffers is in parts, but doing so directly contradicts the JIT system that automakers have so vigorously adopted in the last decade. So, in the automobile industry, there is a variety of different makes and models (innovative) available for the consumer but when you visit the dealership, if you order a vehicle with your desired options, you may have to wait 4-6 weeks for delivery.

That means, even though they are being innovative, they are not being responsive as they should be which would be a mismatch. Same goes with the computer industry—even though PC’s and workstations have replaced mainframes as the dominant technology, and even though acceptable lead time has dropped, because the computer industry has largely retained its emphasis on a physically efficient supply rather than a highly responsive supply chain, most computer companies find themselves in a mismatched situation and position themselves in the upper right hand cell of the matrix.

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