Page 211 - Operations Strategy

186 CHAPTER 5 • PuRCHAsing And suPPly sTRATEgy

The market The gap between what we The perceived differences Can we be sure that our
perception gap believe we need from our in requirements between assumptions concerning
suppliers and what they customers and suppliers. our customer’s needs and
think we need. priorities are correct?
Can we be sure that our
suppliers have the correct
assumptions regarding our
needs and priorities?
The operations The gap between how The differences in perception Can we be sure that
performance gap we see our supplier’s of operations perfor- our customers see our
performance and how mance between customers performance in the same
they see their own and suppliers (objective way that we do?
performance. performance could be Can we be sure that our
different from both). suppliers judge their own
performance in the same
way that we do?
The operations The gap between our The differences between Even assuming our
improvement gap perception of what our an internal perception perception of customers’
customers want and our of performance and an needs and their view
perception of our own internal perception of of our performance
performance. customer’s requirements. are correct, are we
meeting our customers’
requirements?

supply chain instability
Put together both qualitative and quantitative dynamics and it is easy to understand
why supply chains are rarely stable. Figure 5.14 shows the fluctuations in orders over
time in a typical consumer goods chain. One can see that fluctuations in order levels
(the demand at the preceding operation) increase in scale and unpredictability the
further back an operation is in the chain, with relatively small changes in consumer
demand causing wild and disruptive activity swings at the first-tier, and subsequent
suppliers. Four major causes of this type of supply chain behaviour can be identified. 11
1 Demand forecast updating – this was the cause of the dynamics that were illustrated
in Figure 5.10. The order sent to the previous operation in the chain is a function of
the demand it receives from its own customers, plus the amount needed to replenish
its inventory levels. In effect, the view an operation holds about future demand is
being changed every decision period.
2 Order batching – every time a supermarket sells a box of breakfast cereal it does not
order a replacement from its suppliers. Rather, it waits until it needs to order a suf-
ficient quantity to make the order administration, transport etc., economic. This
batching effect may be exaggerated further when many customers batch their orders
simultaneously.
3 Price fluctuation – businesses often use the price mechanism in the short term to
increase sales. The result of price promotions is that customers place orders for quan-
tities of goods that do not correspond to their immediate needs, inducing distortions
into the supply chain. Promotions have been called the ‘dumbest marketing ploy
ever’ in a now-famous Fortune magazine article. 12

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