Page 207 - Operations Strategy

182 CHAPTER 5 • PuRCHAsing And suPPly sTRATEgy
a competitor acquiring a major supplier or customer. From an operations resource per-
spective, economies of scale are important if the total requirement for a given product
or service falls below the optimum level of efficiency. Low volume is one of the main
factors that prevents firms doing things in-house. The level of transaction costs also
is important. Low transaction costs favour market-based arrangements, while the pos-
sibility of jointly reducing transaction costs makes partnership an attractive option.
Partnership is also attractive when there is the potential for learning from a partner. An
absence of any potential learning suggests a more market-based relationship. Finally,
although obvious, it is worthwhile pointing out that any sort of outsourcing, whether
partnership or market based, may be as a response to some sort of resource deficiency.
That is, a firm will go outside for products and services if it does not have the resources
to create them itself.

supply network dynamics

Supply chains have their own dynamic behaviour patterns that tend to distort the
smooth flow of information up the chain and product moving down the chain. Flow
in supply chains can be turbulent, with the activity levels in each part of the chain dif-
fering significantly, even when demand at the end of the chain is relatively stable. Small
changes in one part of the chain can cause seemingly erratic behaviour in other parts.
This phenomenon is known as ‘supply chain amplification’, ‘supply chain distortion’,
‘the Forrester effect’ (after the person who first modelled it) or, most descriptively, ‘the
bull whip effect’.
For convenience, we shall examine the underlying causes of supply chain behaviour
in terms of their
● quantitative dynamics and
● qualitative dynamics.

quantitative supply chain dynamics

Inventory in supply chains has an ‘uncoupling’ effect on the operations they connect,
which has advantages for each operation’s efficiency but it also introduces ‘elasticity’
into the chain, which limits its effectiveness. This is because of the errors and distor-
tions that are introduced to decision making in the chain. Not that the managers of
each individual operation are acting irrationally; on the contrary, it is a rational desire
by the operations in the supply chain to manage their production rates and inventory
levels sensibly. To demonstrate this, examine the production rate and stock levels for
the supply chain shown in Figure 5.12. This is a four-stage supply chain, where an origi-
nal equipment manufacturer (OEM) is served by three tiers of suppliers. The demand
from the OEM’s market has been running at a rate of 100 items per period, but in period
2 demand reduces to 95 items per period. All stages in the supply chain work on the
principle that they will keep in stock one period’s demand. This is a simplification but
not a gross one. Many operations gear their inventory levels to their demand rate. The
column headed ‘stock’ for each level of supply shows the starting stock at the begin-
ning of the period and the finished stock at the end of the period. At the beginning of
period 2 the OEM has 100 units in stock (that being the rate of demand up to period 2).

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