Page 653 - Introduction to Business

CHAPTER 18 The Digital Enterprise 627

Economic Impact of Supply Chain Management
Supply chain management is about minimizing the total costs in the chain and EXHIBIT 18.4
maximizing the value to the end user. In turn, the economic impact of supply chain
Examples of Supply Chain
management is significant because for both goods and services, supply chain costs
Costs as a Percentage of
as a fraction of sales are often considerable, as shown in Exhibit 18.4. Sales
Of greater importance is the impact on profit of reductions in supply
chain costs. Consider a firm whose supply chain costs represent 50 per- Supply Chain Costs
cent of sales, other variable costs represent 20 percent of sales, and fixed Industry (% of sales)
costs represent 25 percent of sales. Then, on sales of $100, profit would
Automobile 67
be $5, or 5 percent of sales. This calculation is illustrated in Exhibit 18.5
Food 60
in the column labeled “Base Case.” Now, if supply chain management
Lumber 61
reduced the supply chain costs by 2 percent, from $50 to $49, then profit
Paper 55
would increase to $6, or 6 percent of sales. This calculation is illustrated
Petroleum 79
in Exhibit 18.5 in the column labeled “Reducing Supply Chain Costs.” On
Transportation 62
the other hand, if sales increased from $100 to $120, then profit would
All industries 52
also increase to $6, or 6 percent of sales. This calculation is illustrated in
Exhibit 18.5 in the column labeled “Increasing Sales.” Therefore, the eco- Source: From Jay Heizer and Barry Render, Opera-
nomic impact on profit of reducing supply chain costs by 2 percent is tions Management, 7th Edition, © 2004. Adapted by
permission of Pearson Education, Inc., Upper Saddle
equivalent to increasing sales by 20 percent. Clearly, the leverage on River, NJ.
profit provided by reducing supply chain costs is enormous.
EXHIBIT 18.5
Supply Chain Management Strategies
Economic Impact on Profit of
There are four basic supply chain management strategies: few versus many suppli-
Reducing Supply Chain Costs
ers, vertical integration, virtual collaboration, and bypassing. In the many suppliers Versus Increasing Sales
option, suppliers respond to a “request for
quotation” from the company, and the Reducing Supply Increasing
contract usually goes to the lowest bidder. Base Case Chain Costs Sales
This is a common approach when prod-
Sales $100 $100 $120
ucts are commodities and suppliers com-
pete aggressively with one another. It also Supply chain costs $ 50 $ 49 $ 60
places the burden of meeting the buyer’s
demands on the supplier. This strategy Other variable costs $ 20 $ 20 $ 24
obviously does not lead to long-term part-
nering with the suppliers. Fixed costs $ 25 $ 25 $ 30
In the few suppliers option, rather than
Profit $ 5 $ 6 $ 6
looking for short-term attributes, such as
low cost, the firm is looking for a long-term
relationship with a few dedicated suppliers. Long-term suppliers are more likely to
understand the broad objectives of the procuring firm and the end customer. Using
few suppliers can create value by allowing suppliers to have economies of scale and
a learning curve that yields both lower transactions costs and lower production costs.
Vertical integration is a supply chain management strategy in which one sup- vertical integration A supply chain
ply chain member develops the ability to perform the function that another supply management strategy where one supply
chain member develops the ability to
chain member has been performing. This may happen by internal efforts or by
perform the function that another supply
acquisition. For example, Ford Motor Company integrated vertically when it chain member has been performing
decided to manufacture its own car radios. In this case, a manufacturer decided to
perform the function of one of its suppliers by internal efforts. As a second exam-
ple, if DaimlerChrysler were to purchase the supplier of radios for its cars, then
DaimlerChrysler would be integrating vertically by acquisition. In both examples,
because Ford Motor Company and DaimlerChrysler are manufacturers and are
“downstream” in the supply chain from their car radio suppliers, it is said that their

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