MGMT1031: Supply Chain Strategy &

Technology

Week 5, Chapter 5:
Purchasing and Supply
Strategy
Notes Based on the Content Found in: Slack Lewis. Operations Strategy 6 th Edition. Pearson. 2020

MGMT1031 Supply Chain Strategy and Technology

 Overview

 Overview
 Make/Buy
 Contracts

MGMT1031 Supply Chain Strategy and Technology 2

 Purchasing and supply strategy

Overview of operations
• The do or buy decision The ‘content’ of The ‘process’ of
strategy
• The role of contracts operations strategy operations strategy

and/or relationships
• Managing supply
dynamics? Capacity strategy
• Manage suppliers over
time An introduction to
operations strategy The process of
• Manage supply chain Purchasing and supply operations strategy –
risks? strategy formulation and
implementation
Operations performance
Process technology
strategy

The process of
operations strategy –
Socially responsible Improvement strategy monitoring and control
operations strategy

Product and service

development strategy

MGMT1031 Supply Chain Strategy and Technology

 What is Purchasing and Supply Strategy

“A set of interconnected organizations whose

different processes and activities together produce
value”

MGMT1031 Supply Chain Strategy and Technology

 Operations performance should be seen as a
whole supply chain issue

Benefits of looking at the whole supply chain include the following:

• Puts the operation into its competitive context
• Helps to identify the key players
• Shifts emphasis to the long term
• Sensitises the operation to macro changes
• Changes the nature of the ‘supplier–buyer’ relationship.

MGMT1031 Supply Chain Strategy and Technology

 Dyadic relationships in a simple supply network
and example
Dyadic- 2 interactions- Traditional Approach
Dyadic interaction Dyadic interaction

Supplier Focal operation Customer

Dyadic interaction Dyadic interaction

Washing
Electric motor
machine maker Retailer
manufacturer

MGMT1031 Supply Chain Strategy and Technology

 Triadic relationship and example

Focal operation/ SCM thinking

buyer
today…
Triadic interaction Groups of Triads
or 3 companies
Supplier Customer
interacting

Airline

Triadic interaction

Baggage
handling agent Passengers

MGMT1031 Supply Chain Strategy and Technology

 Supply Network Perspective…

 Why– each company relates to each differently

 Enhances an understanding of competitive and Cooperative
forces
 Business Ecosystem
 Confronts the operation with its strategic resource options
 Highlights the ‘operation-to-operation’ relationship
– Not Customer- Supplier
 Globalization and sourcing
– Trade blocks; Low cost Env’ts
 Corporate Social Responsibility
 Inter-operations arrangements

MGMT1031 Supply Chain Strategy and Technology

 The value net (based on Brandenburger and
Nalebuff)

Competitors

Focal company

Operations Market
Suppliers Requirements Customers
Resources

Complementors

MGMT1031 Supply Chain Strategy and Technology

 Wimbledon’s tennis balls travel over 80,000 kilometres
in their supply network

MGMT1031 Supply Chain Strategy and Technology

 Types of supply arrangement

Long-term virtual
Vertical
few suppliers
operation
integration
Close –

‘Partnership’ supply
Market relationship

relationships
Type of inter-firm
contact
Transactional –
many suppliers

Traditional market
supply
Virtual spot
trading
Resource scope
Do nothing Do everything
The character of internal operations activity

MGMT1031 Supply Chain Strategy and Technology

 What should we do and what should we buy?

 Basic decision– ‘Do’ (Make/create) or Buy (outsource)

– Fundamental business question: “What is our Business in???”
– Table 5.1 p164

 Vertical Integration (Strategic and operational decision)

– Direction
– Extent
– Balancing among stages
• Full (Exclusive)– sell only to the next stage
• LT Full (Non-exclusive)– Sell to other customers/Competing
priorities

MGMT1031 Supply Chain Strategy and Technology

 The operations scope decision must include both strategic
and operational analysis

Top-down Strategic level

Primary driver – Long-term strategic positioning of the firm

Making the decision means – Factors include –

Usually called – The
vertical integration
decision
Key question – How much
of the supply network do
you want to own?
• Supply network structure
Assessing the strategic
• Strategic ambition
attractiveness of your position
• Capabilities acquisition
in the supply network
• Future competitive landscape
• Risks of knowledge leakage
• Profitability potential

Operations scope – What you do yourself within the operation

and what you outsource

Usually called – The
‘do or buy’ decision
Primary driver – Shorter-term capacity and capabilities of the firm
Key question – Do you
want to do it yourself or
outsource it?
Factors include –
Making the decision means –
• Availability of supplier capability and
Assessing the attractiveness
capacity
of doing activities in-house or
• Purchasing skills and knowledge
out-house
• Relative cost of in-house versus out-
house
• Effect on customer delivery
• Potential for operations improvement

Bottom-up Operational level

Source: Slack, N. (2017) The Operations Advantage, Kogan Page. Reproduced by permission

MGMT1031 Supply Chain Strategy and Technology

 Vertical integration decisions

Exclusive balance Non-exclusive balance

between stages between stages
Backward Forward
integration integration

Focal
operation

Extent of integration

MGMT1031 Supply Chain Strategy and Technology

 Transaction Cost Economics (TCE)

 Transaction cost emerges from the fact that most people

cannot remember everything!!!
– Lack of information
– Not knowing what to do with the information

 Frequency
– Rarely used? Eg Legal

 Asset Specific
– Dedicated/specialized equipment; higher mkt cost

 Uncertainty
– The greater the duration, the more the uncertainty

MGMT1031 Supply Chain Strategy and Technology

 The decision logic of outsourcing

Is significant
Is activity of Does Is company’s operations Explore
strategic company operations performance
importance No have No performance No improvement No outsourcing
? specialised superior? likely? of this
knowledge? activity
Yes Yes Yes Yes

Explore keeping this activity in-house

MGMT1031 Supply Chain Strategy and Technology

 Generic sourcing strategies

INVEST TO PERFORM INTERNALLY PERFORM INTERNALLY TO DEVELOP

critical

(if high potential for opportunism) (if high potential for opportunism)
CONTRIBUTION TO

OUTSOURCE OUTSOURCE
COMPETITIVE
ADVANTAGE

(if possible to mitigate risk of (if possible to mitigate risk of

opportunism) opportunism)
OUTSOURCE
(if possible to mitigate risk of
OUTSOURCE opportunism)
(if possible to mitigate risk of Keep internal
not critical

opportunism) (if lack of capable suppliers and

spin-off not feasible)

RELATIVE CAPABILITY
weaker stronger
POSITION
Source: Adapted from McIvor, R. (2008). ‘What is the right outsourcing strategy for your process?’, European Management Journal, 26, 24–34.

MGMT1031 Supply Chain Strategy and Technology

 Purchasing Strategy- Cube

MGMT1031 Supply Chain Strategy and Technology

 What is the role of contracts and/or
relationships

 Contracts
– Codification- tasks defined/’rules of the game’
– Monitoring- behavior around the rules
– Safeguards- contract enforcement
 Contracts and relationships– complementary
– Lack of alignment can be damaging

MGMT1031 Supply Chain Strategy and Technology

 Supply arrangements are a balance between
contracting and relationship

‘Transactional’ or ‘market- ‘Partnership’ supply

based’ supply arrangements arrangements

Emphasis
Emphasis predominantly on
predominantly on relationships
contracting

MGMT1031 Supply Chain Strategy and Technology

 Elements of process partnership relationships

Attitudes
Trust

Long-term Sharing
expectations success

Joint
learning Multiple points of
contact
Closeness of
relationship

Joint co-ordination of Few relationships

activities

Joint problem Information

solving transparency
Dedicated
assets
Actions

MGMT1031 Supply Chain Strategy and Technology

 Partnership relationships

Partnership relationships are seen as

desirable because they can reduce the
transaction costs of doing business

However…
There are strong forces acting against the
maintenance of trust
MGMT1031 Supply Chain Strategy and Technology
 The ‘prisoner’s dilemma’ decision

Mr. Orange
Confesses Doesn’t confess

Mr. White gets 5 years Mr. White goes free

Confesses
Mr. Orange gets 5 years Mr. Orange gets 10 years

Mr. White

Mr. White gets 10 years Mr. White gets 3 years

Doesn’t confess
Mr. Orange goes free Mr. Orange gets 3 years

MGMT1031 Supply Chain Strategy and Technology

 The ‘prisoner’s dilemma’ decision (Continued)

Assume Mr. Orange confesses

Mr. Orange
Confesses Doesn’t confess

Mr. White gets 5 years Mr. White goes free

Confesses
Mr. Orange gets 5 years Mr. Orange gets 10 years

Mr. White

Mr. White gets 10 years Mr. White gets 3 years

Doesn’t confess
Mr. Orange goes free Mr. Orange gets 3 years

MGMT1031 Supply Chain Strategy and Technology

 The ‘prisoner’s dilemma’ decision (Continued)

Assume Mr. Orange doesn’t confess

Mr. Orange
Confesses Doesn’t confess

Mr. White gets 5 years Mr. White goes free

Confesses
Mr. Orange gets 5 years Mr. Orange gets 10 years

Mr. White

Mr. White gets 10 years Mr. White gets 3 years

Doesn’t confess
Mr. Orange goes free Mr. Orange gets 3 years

MGMT1031 Supply Chain Strategy and Technology

 Degrees of trust

Calculative trust …trusting you is likely to give Based on

me more benefits than not knowledge

Cumulative positive experiences

trusting you...

…I believe I can trust you

because I think I know you
Cognitive trust
enough to be confident you
will behave as I would wish...

…I trust you because I know

that you know that I wouldn’t
Bonding trust let you down and you know Based on
that I know that you wouldn’t feelings
either...

MGMT1031 Supply Chain Strategy and Technology

 How do we mange Supply chain dynamics?

‘Hard’ supply dynamics

Look for the causes of overreaction to volume
changes

 Supply chain Amplification

 Supply Chain Distortion or “Skewness”
– Quantitative Dynamics
– Qualitative Dynamics

MGMT1031 Supply Chain Strategy and Technology

 Quantitative Dynamics: Fluctuations of production levels along
supply chain in response to small change in end-customer demand

Original equipment

D
Third-tier supplier Second-tier supplier First-tier supplier
D

AN
manufacturer
IO

M
R
PE

DE
Prodn. Stock Prodn. Stock Prodn Stock Prodn. Stock
.
1 100 100 100 100
100 100 100 100 100
100 100 100 100
2 100 100 100 100
20 60 80 90 95
60 80 90 95
3 60 80 90 95
180 120 100 95 95
120 100 95 95
4 120 100 95 95
60 90 95 95 95
90 95 95 95
5 90 95 95 95
100 95 95 95 95
95 95 95 95
6 95 95 95 95 95
95 95 95 95
95 95 95 95

Orders Orders Orders Orders

3 2 1 OEM MARKET
Items Items Items Items

Note – All operations keep one period’s inventory

MGMT1031 Supply Chain Strategy and Technology

 Supply chain dynamics (Continued)

Manufacturer’ Wholesaler’s
Store’s orders Sales from
s orders to its orders to
to wholesaler store
suppliers manufacturer

0 0 0 0
Time Time
Time Time Time

Manuf- Whole Retail

Supplie Consumers
acturer -saler Store
r

MGMT1031 Supply Chain Strategy and Technology

 Supply chain dynamics (Continued)

‘Soft’ supply dynamics

Look for the perception gaps

 Understanding of customers needs and

associating it to its operation correctly
 Understanding of performance and its ability to
service its customer

MGMT1031 Supply Chain Strategy and Technology

 Potential perception mismatches in supply chains

Market requirements
Gap? Gap?
Linked?
What A What B What B What C
thinks B thinks it thinks C thinks it
wants wants wants wants
Supplier selection
Gap? strategy Gap?

Operation A Operation B Operation C

Gap? Supplier Gap?
development strategy

How A How B How B How C

thinks it is thinks A is thinks it is thinks B is
performing performing Linked? performing performing
Gap? Gap?

Operations performance

MGMT1031 Supply Chain Strategy and Technology

 Supply chain dynamics (Continued)

 Supply Chain Stability  4 primary issues

(Table 5.3 p181) – Demand Forecast Updates
– Supply Choice – Order Batching
– Supply Development – Price Fluctuations
– Supplier improvement gap – Rationing and shortage gaming
– Market perception gap
– Operations performance gap – See Table 5.4 p186 for strategies
– Operations improvement gap

MGMT1031 Supply Chain Strategy and Technology

 Supply chain dynamics (Continued)

Supply chains with different end objectives need to

be managed in different ways

MGMT1031 Supply Chain Strategy and Technology

 How do we manage supplier networks over
time?

 Supply network configuration

– From single channel to omni-channel (see next slide)
 Short term effects
– Information sharing
– Channel Alignment
– Operational Efficiency

MGMT1031 Supply Chain Strategy and Technology

 Single-, multi-, cross- and omni-channel retail
models

Store Store
Store

Phone Phone

Store App
Phone
App App

Cust- Cust- Cust-

Cust- omer omer omer
omer
Social Social
Web media media
Social Web
media
Web Web

Single-channel Multi-channel Multi-channel Omni-channel

MGMT1031 Supply Chain Strategy and Technology

 Differentiation: Matching Supply network
strategy to market requirements

 Different Market requirements

– Eg Piston for an auto engine v. a Piston for an aircraft
engine
 Different resource objectives
– Speed and cost requirements
– Customer v. technology specific

 Achieving fit between market requirements and

supply chain resource objectives/policies

MGMT1031 Supply Chain Strategy and Technology

 Match supply chain characteristics to the nature of
demand

Nature of demand
FUNCTIONAL PRODUCTS INNOVATIVE PRODUCTS
Predictable Unpredictable
Few changes Many changes
Low variety High variety
Price stable Price mark-downs
Long lead-time Short lead-time
Low margin High margin

Low cost suppliers

High utilisation
Min. inventory
EFFICIENT
Low cost

Match Mismatch
Supply chain objectives

Flexible suppliers
Deployed inventory
Low T/P time
Fast response
RESPONSIVE

Mismatch Match

(After Fisher)
Source: Adapted from Fisher, M.C. (1997) ‘What is the right supply chain for your product?’, Harvard Business Review, March–April, pp. 105–116.

MGMT1031 Supply Chain Strategy and Technology

 How do we manage supply chain risk?

 Types of risk- Table 5.5 p190

 Risks need to be managed however likely
cannot be avoided
“achieve the highest level of profits for varying
levels of risk and do so efficiently”
– Chopra, Sodhi

MGMT1031 Supply Chain Strategy and Technology

 Next Week

 Week 6- Group Presentation Due

 Week 7- Mid-term exam

MGMT1031 Supply Chain Strategy and Technology