Lecture 7: Supply Chain and Logistics Flashcards Preview

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Flashcards in Lecture 7: Supply Chain and Logistics Deck (35):

Define supply chain.

A set of three or more companies, directly linked by one or more of the upstream and downstream flow of products, services, finances and information from a source to a customer


What is a supply network?

A network of connected and independent organisations, mutually and cooperatively working together to control, manage and improve the flow of materials and information from suppliers to end users

(i.e. a mapping of all the different supply chains - can be very complex and extensive, e.g. Toyota)


Outline why supply chains are important in delivering value to a customer

"value chains compete, not individual companies"

M Christopher

  • OEMs (original equipment manufacturers, who supply goods for use as components for other companies) are not only concerned with the final product
  • Customer experience is determined by the supply chain
    • Quality, cost, delivery etc
  • A significant proportion of value is sourced from suppliers
  • Supply chains are connected systems
    • Competitiveness of one tier is a function of the supply and distribution funcitons, i.e. the surrounding tiers


Define supply chain management, outlining the key considerations involved. 

SCM refers to processes and exchanges across multiple firms. Decision-making considers the firm within its value chain, rather than in isolation (OM).

  1. Sourcing/purchasing​​
    • ​​Includes the processes associated with: 
      • Tracking to assess supplier performance
      • Negotiating contract and payment terms
      • Locating and selecting suppliers
      • identifying material and service needs
    • Key decisions:
      • Make or Buy?
      • SC Strategy
      • SC Collaboration
  2. Logistics:
    • plans, implements, and manages the efficient, effective flow and storage of goods and services from the point of origin to the point of end consumption.
    • Key considerations:
      • Where should each company be located?
      • How much should be distributed, where?


Describe the key differences between Operations Management and Supply Chain Management

Main concern:


  • OM: maximise the efficiency of the internal processes
  • SCM: manage the inter-firm networks used to maximise the value for the ultimate customer ("user/chooser")


  • OM: focal firm only
  • SCM: dynamic interplay between firms

Opimisationlocal vs. global

  • OM: optimises within-fim processes, with respect to the impact on the focal firm and immediate customer
  • SCM: sub-optimisation of the operation at the local firm, in order to support a holistric strategy
    • (considering other suppliers' POV may incur trade-offs, e.g. for EOQ)




List the 5 key "design" decisions in supply networks

  1. How should the network be configured?
  2. Make or buy?
  3. Where should each part of the network owned by the company be located?
  4. How much to distribute, and to where?
  5. What distribution strategy should be used?


What choices are involved wrt supply network configuration? What factors affect a company's freedom to make these choices?

Supply network configuration "choices":

  1. Number of tiers
  2. Number of suppliers at each tier
  3. Number of alternative suppliers
  4. Level of control

Freedom in making these "choices" depends on:

  1. Company size
  2. Number of available suppliers
  3. Standard vs. specialised components
  4. etc.


Give an example of a firm who chose to reduce the number of tiers involved in their supply chain

Dell [2000s]

    • Disintermediation, aka "cutting out the middle man"
      • Sold to customers directly, cutting out the retailer and distributor
      • Reduced the need for forecasting
    • Usually an internet strategy
    • Modular product design
      • Components could be bought in as modules
    • Late customisation
    • Good relationship with suppliers
      • Only needed to hold ~2 weeks inventory
        • ​​​​​Modules assembled to make what the cu


Give an example of when having few alternative suppliers has affected competitive behaviour.

Nokia / Eriksson: Philips Factory Fire

  • Both used the same supplier for RF chips
    • A Philips factory in New Mexico
    • 40% of output went to Nokia and Erikkson
  • Lightning strike caused a fire in 2000
    • Destroyed much of the factory, contaminated stock
  • Limited alternatives were globally available
    • Nokia acted faster to buy up all global stock
    • Ericsson was left with a supply shortage, ultimately exiting the cell phone manufacturing business


Give 4 key considerations in determining how a supply network should be configured

  1. Simplicity - firms should have alternative suppliers, but not too many
  2. Complexity of product - determines the no. of supplier tiers
  3. Selling channels - determines the no. of customer tiers
  4. Resilient vs. Efficient supply chain considerations


Explain why firms face a make or buy decision when managing their supply chain.

  • Also known as the vertical integration decision
  • Usually, no single company does everything that is required to produce its products
  • Every company has its own core competency (Prahlad & Hamel, 1990)
    • They specialise in this, becoming more efficient
  • This gives rise to outsourcing (Venkatesan, 1992)
  • Sometime, many indirect processes are also outsourced
    • Business process outsourcing


Define outsourcing and give 4 reasons why this may be cheaper than in-house. 

The obtainment of goods or services from an external supplier company

4 key reasons why outsouring may be cheaper:

  1. Economies of scale
  2. Economies of scope
  3. Labour costs
    • Supplier may already have the specialised labour required
  4. Licensing processes
    • Suppliers may have already gone through legal processes to get certification


Define economies of scope.

“a proportionate saving gained by producing two or more distinct goods, when the cost of doing so is less than that of producing each separately”

- Oxford English Dictionary


Explain the reasons why buying a product from a supplier may not be cheaper than making it

  • Every commercial boundary introduces an extra cost
    1. Tendering
      • ​Asking multiple suppliers for quotes etc.
    2. Deliveries
    3. Inventory
    4. Contractual - incentives for both parties to do this properly
      • Supplier: prevent contractual pedantry
      • Buyer: ensure product fulfils requirements
    5. Asset-specific investments
      • If buying a non-standard product, the supplier may need to invest in new equipment, machinery etc. 
      • Who funds this? Both parties reluctant to invest or become dependent
    6. Monitoring
      • Building a relationship with the supplier, monitoring quality/delivery etc. 
    7. Contingency plans 
  • These costs are relationship-dependent
  • Must be weighed up against the pros and cons of producing in-house


Outline the advantages (5) and disadvantages (4) of outsourcing.


  1. Focus on core competencies
  2. Harness lower labour cost at supplier
  3. Access to technology
  4. Stable and predictable financial planning in fee-for-transaction services
  5. Less investment risk


  1. Loss of control over process
  2. Limited ability to improve processes
  3. Risk of opportunistic behaviour of supplier
  4. Loss of human capital and tacit knowledge
    • ​​Have to "start from scratch" if you choose not to outsource any more


For each of the 5 key performance objectives, the advantages and disadvantages of making and buying.

  1. Quality
    • Make:​​
      1. ​Better traceability
      2. Risk of complacency
      3. Lack of expertise might affect quality
    • Buy:
      1. Supplier might have specialsied knowledge
      2. Communication of quality problems difficult  
  2. Speed
    • Make:
      1. ​Closer synchronisation of schedules
      2. If the operations has external customers, internal customers may receive low priority
    • Buy:
      1. ​​Speed of response can be built into the contract
      2. May be significant transport delays
  3. Dependability
    • Make:
      1. ​Easier communication improves dependability
      2. Similar issues as in speed for priority of internal customers 
    • Buy:
      1. Late delivery penalties in the contract can encourage good delivery performance
      2. Distance and organisational barriers might inhibit communication
  4. Flexibility 
    • ​Make:
      1. ​​Easy to alert when change is needed
      2. Ability to respond may be limited by the scale and scope of operations
    • Buy:
      1. Contract suppliers likely to have wider capabilities
      2. Communication delays might hamper flexibility
      3. Conflicting needs of different customers
  5. Cost
    • Make:
      1. Potential for sharing costs between different departments
      2. Do not have to make the margins required by outside suppliers
      3. Economies of scale difficult to achieve
    • Buy:
      1. Economies of scale
      2. Suppliers motivated to reduce their costs
      3. Extra costs of communication, transportation and coordination


Give 5 key reasons why a firm might prefer to keep an activity in-house

  1. The activits is of strategic importance
  2. The company has specialised knowledge
  3. The company's operations performance is superior
  4. (Failing 3) significant operations performace improvement is likely 


Define vertical integration, listing the main advantages and disadvantages this has for a firm. 

Merging together two or more businesses which are at different stages of production, e.g. a food manufacturer and a chain of supermarkets


  • As span of control increases, so should power in the marketplace
  • Lower uncertainty
  • Better coordination
  • Lower transaction costs


  • Higher internal coordination required
  • Weaker motivation for improvement
  • (for market/consumers) greater risk of monopolisation


Give an example of a firm firm which is successfully vertically integrated

Reliance Industries, India

  • Largest private sector company in India
    • Annual revenue $66 billion
  • Activities span:
    • Exploration and production of oil and gas
    • Petroleum refining and marketing
    • Petrochemicals (polyester, bibre intermediates, plastics and chemicals)
    • Textiles
    • Retail
  • The largest polyester yarn and fibre producer in the world


Define offshoring and outline the advantages (3) and disadvantages (5) of this.

The practice of basing some of a company's processes overseas, to take advantage of lower costs

​(NB outsourcing and offshoring are neither mutually exclusive or inclusive)


  1. Lower labour costs
  2. Development of new markets
  3. Offset requirements


  1. Distance to existing customers
  2. Customer perception
  3. Not all jobs can be relocated
  4. Long logistics lead-times, transportation and inventory cost
  5. Strategic risks: political, currency, IP


What are offset requirements?

A trade condition (part of a bilateral or multilateral trade agreement) that requires a foreign exporter to purchase domestic products within its country and/or invest in the importing country.

- http://www.businessdictionary.com/


Outline the supply side and demand side factors that affect location decisions

Supply-side: influence cost

  1. Labour costs
  2. Land costs
  3. Energy costs 
  4. Transportation costs
  5. Community factors


Demand-side: influence customer service/revenue

  1. Labour skills
  2. Suitability of site
  3. Image
  4. Convenience for customers


Give an example of a firm which has chosen to locate their activities in a specific place, and explain why they have done this.

Absolut Vodka, Sweden

  • Sells 2/3 of its production to North America
  • However, when increasing its capacity is chose to retain all produciton in Sweden
  • In the premium vodka market, quality & authenticity are essential
  • Producing solely in Sweden ensures quality and maintains the brand image


State the impacts, drivers and objectives of location choice.


  • The choice of location can have a significant impact on profitability
  • E.g. retailing - a few metres can make the difference between profit and loss

Drivers - location changing decisions are prompted by:

  1. Changes in demand for goods and services
  2. Changes in supply of inputs to the operation

Objective - to achieve an appropriate balance between:

  1. Spatially variable costs of an operation, e.g. rent
  2. The service the operation is able to provide to its customers
  3. The revenue potential of the operation



List the key factors affecting a firm's choice of country/region.


  1. Financial
    • Exchange tariffs
    • Taxes 
    • Shipping costs
  2. Regulatory
    • Employment
    • Environmental
    • Safety/Construction


  1. Labour force
    1. Costs
    2. Education/skill
  2. Local culture
    1. Ethics
    2. Language
  3. Proximity to markets


  1. Risk
    • Political stability
    • Economic stability
    • Social stability


  1. Infrastructure
    • ​Transportation
  2. Within country
    1. ​Access to ports
    2. Location relative to transportation network
    3. Location relative to suppliers


What is MAU analysis? List the steps involved.

Multi-Attribute Utility (MAU) analysis is used to select a country or region 


  1. Identify the n most important criteria
  2. Assign each criterion a weighting factor, F, between 0 and 1, such that ∑ 1 F = 1
    • Subjective - could determine experts' collective weighting factors by holding a workshop (or just asking directly)
  3. Give each location a score, S, on each criterion
  4. Multiply the score by the weighting factor
  5. Calculate ∑(FxS) for each location
  6. Choose the location with the maximum score


What are the advantages and disadvantages of MAU analysis?


  • Covers all dimensions
  • Quantitative output


  • Weights are assigned subjectively: opinion-based


Describe the steps in the North West Corner Method.

  1. Create a martix of sources and destinations
  2. Set initial allocation from the NW corner
  3. Calculate the change in cost of supplying one unit from each currently empty cell, while preserving demand/supply rim conditions (i.e. the opportunity cost)
  4. Re-allocate the max. possible quantity (subject to rim conditions) to the lowest-cost cell, following the path evaluated
  5. Solution is optimal if all the opportunity costs are zero or positive


Outine the limitations of the North West Corner Method.

  1. A heuristic - solution is feasible, but not necessarily optimal
  2. Results sensitive to the starting point selected
  3. Complex for multiple item types
  4. No transport variations
  5. Fixed supply/demand


How do is the North West Corner Heuristic adapted to cope with unequal supply and demand?

If supply > demand, create dummy distribution points with zero transportation cost to represent surplus supply


f demand > supply, create dummy factory with zero transportation costs to represent unsatisfied demand


How do is the North West Corner Heuristic adapted to cope with degeneracy?

  • This happens when:

# of filled cells < (# of rows + # of columns + 1)

i.e. (m + n - 1)

  • Prevents cell evaluation
  • Can be solved by regarding one of the unallocated squares a having an infinitely small ε allocation​
    • ​Does not affect constraints
    • Treated the same as other allocations
    • However, makes it possible to meet the (m + n - 1) confition


What is the key objective of a distribution strategy? List three key distribution strategies.

To make products available to the customers at minimum cost, damage and time

Key strategies:

  1. Direct shipping
  2. Warehousing
  3. Cross-docking



Outline the key features of direct shipping.

  • Example: Nescafe -> tesco stores
  • Point-to-point delivery - direct from supplier to customer
    • Reduced transportation and storage costs
    • Additional planning and administration 
  • Mostly used for perishables and specialty products
  • Trucks may not be full, best for high volume goods
  • Might not be the best option if the factory is remote


Outline the advantages and disadvantages of warehousing.

"Sort, store, pick, load"

Remote production, variable finished-goods demand


  1. Finished goods stored until demand arrives
  2. Companies share the same resources
  3. Some goods may require this e.g. goods with maturation point
  4. Allows companies to work with optimal transport and order quantities
  5. Allows companies to get closer to customers with less cost


  1. Obsolescence - demand declines with time
  2. Handling errors - only suitable for less fragile items
  3. Inventory costs - renting storage, hiring workers etc.


Describe the key features, advantages and disadvantages/limitations of cross-docking.

Items distributed continuously from suppliers through warehouses to customers

  • Multiple factories and suppliers deliver to the same distribution centre
  • Outbound lorries contain a mixture of goods
  • Used by mass retailers


  • Warehouse rarely keeps items for > 10-15 hours → minimal storage costs 
  • Better quality due to less handling
  • Allows outbound lorries to be full


  • Close linkages between all participants in supply chain
  • IT support
  • Fast transportation
  • Large distribution volumes to justify cost