Chapter 2

Supply Strategy

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 Key Questions Addressed in Chapter 2

• How can supply and the supply chain contribute

effectively to organizational objectives and
strategy?

• How can the organizational objectives and

strategy properly reflect the contribution and
opportunities offered in the supply chain?

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 Three Levels of Strategic Planning

• Corporate: Decisions and plans that answer:

– What business are we in?
– How will we allocate resources among these businesses?

• Business unit: Decisions mold the plans of a particular

business unit to contribute to corporate strategy

• Function: Plans concern:

– How each functional area contributes to business strategy
– Allocation of internal resources

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Supply Strategy Interpreted in
Organizational Strategy

Supply Organizational
Objectives Objectives

Supply Organizational
Strategy Strategy

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Supply Strategy Links Current and
Future Markets to Current and
Future Needs

Current Future
Needs Needs

Current Future
Markets Markets

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 Normal Organizational and
Supply Objectives
Organizational Supply
Objectives Objectives
• Survival • Quality
• Growth • Quantity
• Financial • Delivery
• Environmental • Price
• Service

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 Three Challenges in Setting Supply
Objectives and Strategies

• Effective interpretation of corporate objectives

and supply objectives
• The choice of the appropriate action plan or
strategy to achieve the desired objectives
• The identification and feedback of supply issues
to be integrated into organizational objectives
and strategies

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 Six Major Supply Strategy Areas

1. Assurance of supply
2. Cost reduction
3. Supply chain support
4. Environmental change
5. Competitive edge
6. Risk management

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 Three Categories of Supply Risk

1. Operational:
Risk of interruption of the flow of goods or services

2. Financial:
Risk that the price of the goods or services acquired
will change significantly

3. Reputational:
Risk that the organization’s reputation will be harmed
by a supply decision

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 Managing Supply Risks

• Identify and classify risks

• Assess impact and probability of risk event

• Develop a risk management strategy

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 Corporate Risk Management

• All organizations are exposed to supply risk and

other forms of risk

• In large organizations, a corporate risk management

group headed by a risk manager or chief risk officer
(CRO) assesses total risk exposure and seeks the
best ways of managing all risks

• The chief purchasing officer works with the CRO in

the three areas of supply risks

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 Strategic Purchasing Planning
Process
Restate
organizational goals Identify and
analyze alternatives

Determine supply Determine

objectives to contribute supply strategy
to organizational goals
Review implementation
Isolate factors affecting factors
achievement of
supply objectives Gain commitment
and implement

Evaluate

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 Examples of Organizational
Strategies Involving Supply
1. Materials management

2. Project management

3. Logistics management

4. Supply chain management

5. JIT purchasing/production

6. Make or buy/insource or outsource

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 Supply Strategy Questions

• What
– Make or buy/insource or outsource
– Standard versus special

• Quality
– Quality versus cost
– Supplier involvement

• How much
– Large versus small quantities (inventories)

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 Supply Strategy Questions

• Who
– Centralized or decentralized
– Location of staff
– Top management involvement

• When
– Now versus later
– Forward buy

• What Price
– Premium, standard, lower
– Cost-based, market-based
– Lease/make/buy

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 Supply Strategy Questions

• Where
– Local, regional
– Domestic, international
– Large versus small
– Multiple, single versus sole source
– Current, new versus newly developed supplier
– High versus low supplier turnover
– Supplier certification
– Supplier ownership

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 Supply Strategy Questions
• How
– Systems and procedures
– e-Commerce
– Negotiations
– Competitive bids
– Fixed bids
– Blanket orders/open orders
– Systems contracting
– Group buying
– MRP
– Short- or long-term contracts
– Ethics
– Aggressive or passive
– Purchasing research
– Value analysis
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 Supply Strategy Questions

• Why?
– Objectives congruent operationally and
strategically
– Market conditions current and future
– Internal reasons
• Outside supply
• Inside supply

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