Page 191 - Operations Strategy

166 CHAPTER 5 • PuRCHAsing And suPPly sTRATEgy

Figure 5.6 Types of supply arrangement

Close – few suppliers Long-term integration
Vertical
virtual
operation
‘Partnership’
supply
relationships
Type of inter-firm contact Market relationship Virtual Traditional

market
supply
spot
Transactional – many suppliers trading Resource scope

The character of internal operations activity
Do Do
nothing everything

of its operations, there will be few (probably one) internal suppliers. This allows the
potential for very close arrangements. At the other extreme, an operation may choose
to do nothing in-house and buy in all its requirements – the so-called ‘virtual company’
that retains relatively few physical resources. Its network is one of information and con-
tacts with other players in the network who can supply all it requires to satisfy its own
customers. When the nature of these supply arrangements is temporary and market-
based, it is called ‘virtual spot trading’. Spot trading means that at any point in time an
organisation looks at the spot price, or spot terms of supply, and makes a choice inde-
pendently of what its previous or future choices might be. But not all virtual operations
need to be based on transactional market arrangements. When almost all its activities are
outsourced, an organisation may seek to compensate for its lack of control by attempt-
ing to build long-term and close arrangements with relatively few suppliers. This is the
long-term virtual operation.

do or buy? The vertical integration decision

The decision whether to do (i.e. create, deliver, design etc.) something within the organ-
isation (‘in-house’), or buy it from external suppliers (outsource it) is arguably the most
fundamental purchasing and supply strategy issue. Too often the decision is made on
narrow, short-term cost savings, with firms who are struggling to be price competi-
tive and searching for ways to shift their cost base – often by using global suppliers.

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