Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Office of the Vice President for Academic Affairs
College of Accountancy and Finance

OPERATIONS MANAGEMENT
AND TQM
(BUMA 20093)

OPERATIONS PERFORMANCE

PREPARED BY:

MHICO S. MATEO

SUBMITTED TO
PROF. MARIFEL I. JAVIER

JUNE 15, 2021

PUP A. Mabini Campus, Anonas Street, Sta. Mesa, Manila 1016

Direct Line: 335-1730 | Trunk Line: 335-1787 or 335-1777 local 000
Website: www.pup.edu.ph | Email: inquire@pup.edu.ph

THE COUNTRY’S 1st POLYTECHNICU

 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

TABLE OF CONTENTS
SUPPLY CHAIN MANAGEMENT
Page

What is Supply Chain Management? . . . . . . . . . .2

Internal and External Supply Chains. . . . . . . . . .2

Tangible and Intangible Supply Chains. . . . . . . . .2

How Should Supply Chains Compete? . . . . . . . . .3

Performance Objectives for Supply Networks. . . . . . . .3

Lean Versus Agile Supply Networks. . . . . . . . . .4

How Should Relationships in Supply Chains Be Managed? . . . .5

Contracting and Relationships. . . . . . . . . . . .6

Contract-Based ‘Transactional’ Relationships. . . . . . . .7

Long-Term ‘Partnership’ Relationships. . . . . . . . . .8

Which Type of Relationship? . . . . . . . . . . .9

REFERENCES . . . . . . . . . . . . . . . . 10

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INTRODUCTION OR OVERVIEW OF
SUPPLY CHAIN MANAGEMENT

What is Supply Chain Management?

Supply chain management (SCM) is the management of the relationships and
flows between the ‘string’ of operations and processes that produce value in the form
of products and services to the ultimate consumer. It is a holistic approach to
managing across the boundaries of companies and of processes. Technically, supply
chains are different to supply networks. A supply network is all the operations that
are linked together so as to provide products and services through to end customers.
In large supply networks there can be many hundreds of supply chains of linked
operations passing through a single operation. The same distinction holds within
operations. For internal supply networks, and supply chains, management concerns
flow between processes or departments. Confusingly, the terms ‘supply network
management’ and ‘supply chain management’ are often (mistakenly) used
interchangeably. It is also worth noting that the ‘flows’ in supply chains are not
restricted to the downstream flow of products and services from suppliers through to
customers. Although the most obvious failure in supply chain management occurs
when the downstream flow of products and services fails to meet customer
requirements, the root cause may be a failure in the upstream flow of information.
Modern supply chain management is as much concerned with managing information
flows (upstream and downstream) as it is with managing the flow of products and
services.
Internal and External Supply Chains
Although we often describe supply chains as an interconnection of
‘organizations’, this does not necessarily mean that these ‘organizations’ are
distinctly separate entities belonging to and managed by different owners. The idea
of networks can be applied, not just at the supply network level of ‘organization-to-
organization’ relationships, but also at the ‘process-to-process’ within operation level
and even at the ‘resource-to-resource’ within-process level. We also introduced the
idea of internal customers and suppliers. Put these two related ideas together and
one can understand how some of the issues that we will be discussing in the context
of ‘organization-to-organization’ supply chains can also provide insight into internal
‘process-to-process’ supply chains.
Tangible and Intangible Supply Chains
Almost all the books, blogs and articles on supply chain management deal
with relationships between what we called ‘material transformation’ operations: that
is, operations concerned with the creation, movement, storage or sale of physical

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products. But the idea of supply networks (and therefore, supply chains) applies
equally to operations with largely or exclusively intangible inputs and outputs, such
as financial services, retail shopping malls, insurance providers, healthcare
operations, consultants, universities, and so on. All these operations have suppliers
and customers, they all purchase services, they all have to choose how they get their
services to consumers – in other words, they all have to manage their supply chains.

How Should Supply Chains Compete?

Supply chain management shares one common, and central, objective – to
satisfy the end customer. All stages in the various chains that form the supply
network must eventually include consideration of the final customer, no matter how
far an individual operation is from the end customer. When a customer decides to
make a purchase, he or she triggers action back along a whole series of supply
chains in the network. All the businesses in the supply network pass on portions of
that end customer’s money to each other, each retaining a margin for the value it has
added. Thus, each operation in each chain should be satisfying its own customer,
but also making sure that eventually the end customer is also satisfied.
Performance Objectives for Supply Networks
The objective of any supply network is to meet the requirements of end
customers by supplying appropriate products and services through its many supply
chains when they are needed at a competitive cost. Doing this requires the supply
network to achieve appropriate levels of the five operations performance objectives
of quality, speed, dependability, flexibility and cost:
Quality – The quality of a product or service when it reaches the customer is
a function of the quality performance of every operation in the chain that supplied it.
The implication of this is that errors in each stage of the chain can multiply in their
effect on end customer service (if each of seven stages in a supply chain has a 1 per
cent error rate, only 93.2 per cent of products or services will be of good quality on
reaching the end customer, that is 0.99 7). This is why, only by every stage taking
some responsibility for its own and its suppliers’ performance, can a supply chain
achieve high end customer quality.
Speed – This has two meanings in a supply chain context. The first is how
fast customers can be served (the elapsed time between a customer requesting a
product or service and receiving it in full), an important element in any business’s
ability to compete. However, fast customer response can be achieved simply by
over-resourcing or over-stocking within the supply chain. For example, very large
stocks in a retail operation can reduce the chances of a stockout to almost zero, so
reducing customer waiting time virtually to zero. Similarly, an accounting firm may be

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able to respond quickly to customer demand by having a very large number of
accountants on standby waiting for demand that may (or may not) occur. An
alternative perspective on speed is the time taken for goods and services to move
through the chain. So, for example, products that move quickly down a supply chain
from raw materials suppliers through to retailers will spend little time as inventory
because, to achieve fast throughput time, materials cannot dwell for significant
periods as inventory. This in turn reduces the working capital requirements and other
inventory costs in the supply chain, so reducing the overall cost of delivering to the
end customer. Achieving a balance between speed as responsiveness to customers’
demands and speed as fast throughput (although they are not incompatible) will
depend on how the supply chain is choosing to compete.
Dependability – Dependability in a supply chain context is similar to speed in
as much as one can almost guarantee ‘on-time’ delivery by keeping excessive
resources, such as inventory, within the chain. However, dependability of throughput
time is a much more desirable aim because it reduces uncertainty within the chain. If
the individual operations in a chain do not deliver on time as promised, there will be a
tendency for customers to over-order, or order early, in order to provide some kind of
insurance against late delivery. The same argument applies if there is uncertainty
regarding the quantity of products or services delivered. This is why delivery
dependability is often measured as ‘on time, in full’ in supply chains.
Flexibility – In a supply chain context this is usually taken to mean the chain’s
ability to cope with changes and disturbances. Very often this is referred to as supply
chain agility. The concept of agility includes previously discussed issues such as
focusing on the end customer and ensuring fast throughput and responsiveness to
customer needs. But, in addition, agile supply chains are sufficiently flexible to cope
with changes, either in the nature of customer demand or in the supply capabilities of
operations within the chain.
Cost – In addition to the costs incurred within each operation to transform its
inputs into outputs, the supply chain as a whole incurs additional costs that derive
from each operation in a chain doing business with each other. These transaction
costs may include such things as the costs of finding appropriate suppliers, setting
up contractual agreements, monitoring supply performance, transporting products
between operations, holding inventories, and so on. Many of the recent
developments in supply chain management, such as partnership agreements or
reducing the number of suppliers, are an attempt to minimize transaction costs.
Lean Versus Agile Supply Networks
A distinction is often drawn between supply networks that are managed to
emphasize efficiency – lean supply networks – and those that emphasize
responsiveness and flexibility – agile supply networks. These two modes of

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managing supply chains are reflected in an idea proposed by Professor Marshall
Fisher that supply networks serving different markets should be managed in different
ways. Even companies that have seemingly similar products or services, in fact, may
compete in different ways with different products. For example, shoe manufacturers
may produce classics that change little over the years, as well as fashion shoes that
last only one season. Chocolate manufacturers have stable lines that have been sold
for 50 years, but also produce ‘specials’ associated with an event or film release, the
latter selling only for a matter of months. Hospitals have routine ‘standardized’
surgical procedures such as cataract removal, but also have to provide emergency
post-trauma surgery. Demand for the former products will be relatively stable and
predictable, but demand for the latter will be far more uncertain. Also, the profit
margin commanded by the innovative product will probably be higher than that of the
more functional product. However, the price (and therefore the margin) of the
innovative product may drop rapidly once it has become unfashionable in the market.
The supply chain policies that are seen to be appropriate for functional
products and innovative products are termed efficient (or lean) and responsive (or
agile) supply chain policies, respectively. Efficient supply chain policies include
keeping inventories low, especially in the downstream parts of the network, so as to
maintain fast throughput and reduce the amount of working capital tied up in the
inventory. What inventory there is in the network is concentrated mainly in the
manufacturing operation, where it can keep utilization high and therefore
manufacturing costs low. Information must flow quickly up and down the chain from
retail outlets back up to the manufacturer so that schedules can be given the
maximum amount of time to adjust efficiently. The chain is then managed to make
sure that products flow as quickly as possible down the chain to replenish what few
stocks are kept downstream.
By contrast, responsive supply chain policy stresses high service levels and
responsive supply to the end customer. The inventory in the network will be deployed
as closely as possible to the customer. In this way, the chain can still supply even
when dramatic changes occur in customer demand. Fast throughput from the
upstream parts of the chain will still be needed to replenish downstream stocks, but
those downstream stocks are needed to ensure high levels of availability to end
customers.

How Should Relationships in Supply Chains Be Managed?

The ‘relationship’ between operations in a supply chain is the basis on which
the exchange of products, services, information and money is conducted. As such,
managing supply chains is about managing relationships, because relationships
influence the smooth flow between operations and processes. Different forms of

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relationship will be appropriate in different circumstances. Two dimensions are
particularly important – what the company chooses to outsource and who it chooses
to supply it. In terms of what is outsourced, key questions are ‘how many activities
are outsourced?’ (from doing everything in-house at one extreme to outsourcing
everything at the other extreme), and ‘how important are the activities outsourced?’
(from outsourcing only trivial activities at one extreme to outsourcing even core
activities at the other extreme). We discussed these in detail in Chapter 5 when
exploring the scope of supply networks. When dealing with the question of who is
chosen to supply products and services, again two questions are important: ‘how
many suppliers will be used by the operation?’ (from using many suppliers to perform
the same set of activities at one extreme to only one supplier for each activity at the
other extreme), and ‘how close are the relationships?’ (from ‘arm’s length’
relationships at one extreme to close and intimate relationships at the other
extreme).
Contracting and Relationships
There are two basic ingredients of supply interactions that are connected to
the horizontal axis of Figure 12.7, namely ‘contracts’ and ‘relationships’. Whatever is
the arrangement with its suppliers that a firm chooses to take, it can be described by
the balance between contracts and relationships (see Fig. 12.8). They complement
each other, but can cause major problems with suppliers if they are not balanced.
The more a supply agreement is market based with purchases based on relatively
short-term arrangements, the more the agreement is likely to be defined in a detailed
contract. By contracts we mean explicit, usually written and formal documents that
specify the legally binding obligations and roles of both parties in a relationship. The
more a supply agreement is based on long-term, usually exclusive, agreements, the
more a broad, trust based, partnership agreement is appropriate. In any one
operation a range of different approaches will be required.

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Contract-Based ‘Transactional’ Relationships

Contract-based transactional relationships involve purchasing goods and
services in a ‘pure’ market fashion, often seeking the ‘best’ supplier every time it is
necessary to make a
purchase. Each
transaction effectively
becomes a separate
decision and as
such the
orientation is short
term. Often, price will
dominate the
decision- making
process with
minimal
information sharing
between the buyer
and the supplier,
and with no guarantee
of further trading

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between the parties once the goods or services are delivered and payment is made.
The advantages of contract-based transactional relationships are usually seen as
follows:
● They maintain competition between alternative suppliers. This promotes a
constant drive between suppliers to provide best value.
● A supplier specializing in a small number of products or services, but
supplying them to many customers, can gain natural economies of scale, enabling
the supplier to offer the products and services at a lower price than if customers
performed the activities themselves on a smaller scale.
● There is inherent flexibility in outsourced supplies. If demand changes,
customers can simply change the number and type of suppliers – a faster and
cheaper alternative to redirecting internal activities.
● Innovations can be exploited no matter where they originate. Specialist
suppliers are more likely to come up with innovations that can be acquired faster and
cheaper than developing them in-house. There are, however, disadvantages of
buying in a purely contractual manner:
● Suppliers owe little loyalty to customers. If supply is difficult, there is no
guarantee of receiving supply.
● Choosing who to buy from takes time and effort. Gathering sufficient
information and making decisions continually are, in themselves, activities that need
to be resourced.
● Short-term contractual relationships of this type may be appropriate when
new companies are being considered as more regular suppliers, or when purchases
are one-off or very irregular (for example, the replacement of all the windows in a
company’s office block would typically involve this type of competitive-tendering
market relationship).
Long-Term ‘Partnership’ Relationships
Partnership relationships in supply chains are sometimes seen as a
compromise between vertical integration on the one hand (owning the resources
which supply you) and transactional relationships on the other. Partnership (or
‘collaborative’) relationships involve a longer term commitment between buyers and
suppliers. These relationships emphasize co-operation, frequent interaction,
information sharing and joint problem solving (see Fig. 12.9). At their core,
partnerships are close and trusting relationships, the degree to which is influenced
by a number of factors:

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● Sharing success – both partners jointly benefit from the co-operation rather
than manoeuvring to maximize their own individual contribution. This may sometimes
involve formal profit-sharing arrangements.
● Long-term expectations – relatively long-term commitments, but not
necessarily permanent ones.
● Multiple points of contact – communication not restricted to formal channels,
but may take place between many individuals in both organizations.
● Joint learning – a relationship commitment to learn from each other’s
experience.
● Few relationships – a commitment on the part of both parties to limit the
number of customers or suppliers with whom they do business.
● Joint co-ordination of activities – fewer relationships allow joint co-ordination
of activities such as the flow of materials or service, payment, and so on.
● Information transparency – confidence is built through information exchange
between the partners.
● Joint problem solving – jointly approaching problems can increase
closeness over time.
● Trust – probably the key element in partnership relationships. In this
context, trust means the willingness of one party to relate to the other on the
understanding that the relationship will be beneficial to both, even though that cannot
be guaranteed. Trust is widely held to be both the key issue in successful
partnerships and, by far, the most difficult element to develop and maintain.

Which Type of Relationship?

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It is very unlikely that any business will find it sensible to engage exclusively in
one type of relationship or another. Most businesses will have a portfolio of, possibly,
widely differing relationships. Also, there are degrees to which any particular
relationship can be managed on a transactional or partnership basis. The real
question is: ‘where, on the spectrum from transactional to partnership, should each
relationship be positioned?’ And, while there is no simple formula for choosing the
‘ideal’ form of relationship in each case, there are some important factors that can
sway the decision. The most obvious issue will concern how a business intends to
compete in its marketplace. If price is the main competitive factor then the
relationship could be determined by which approach offers the highest potential
savings. On the one hand, market-based contractual relationships could minimize
the actual price paid for purchased products and services, while partnerships could
minimize the transaction costs of doing business. If a business is competing primarily
on product or service innovation, the type of relationship may depend on where
innovation is likely to happen. If innovation depends on close collaboration between
supplier and customer, partnership relationships are needed. On the other hand, if
suppliers are busily competing to outdo each other in terms of their innovations, and
especially if the market is turbulent and fast growing (as with many software and
Internet-based industries), then it may be preferable to retain the freedom to change
suppliers quickly using market mechanisms. However, if markets are very turbulent,
partnership relationships may reduce the risks of being unable to secure supply.
The main differences between the two ends of this relationship spectrum
concerns whether a customer sees advantage in long-term or short-term
relationships. Contractual relationships can be either long or short term, but there is
no guarantee of anything beyond the immediate contract. They are appropriate when
short-term benefits are important. Many relationships and many businesses are best
concentrating on the short term (especially if, without short-term success, there is no
long term). Partnership relationships are by definition long term. There is a
commitment to work together over time to gain mutual advantage. The concept of
mutuality is important here. A supplier does not become a ‘partner’ merely by being
called one. True partnership implies mutual benefit, and often mutual sacrifice.
Partnership means giving up some freedom of action in order to gain something
more beneficial over the long term. If it is not in the culture of a business to give up
some freedom of action, it is very unlikely ever to make a success of partnerships.
Opportunities to develop relationships can be limited by the structure of the market
itself. If the number of potential suppliers is small, there may be few opportunities to
use market mechanisms to gain any kind of supply advantage and it would probably
be sensible to develop a close relationship with at least one supplier. On the other
hand, if there are many potential suppliers, and especially if it is easy to judge the
capabilities of the suppliers, contractual relationships are likely to be best.

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REFERENCES

Slack, N., Brandon-Jones, A., & Johnston, R. (2016). Operations Management:

Eighth Edition. Retrieved June 10, 2021 on

https://drive.google.com/file/d/1DbuG9St-

jX3KmXOBr93MMIJiXCqVWZ9D/view?

fbclid=IwAR0sTYRvLtYt4ejtZoUHCk46sbEFVyoJlStH1G7niPLMD3Qa5hY62N

UJ_MQ

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