OPERATIONS STRATEGY STUDY GUIDE

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					Operations Strategy – Student Study Guide


CHAPTERS 6 and 7

SUPPLY NETWORK RELATIONSHIPS, SUPPLY NETWORK
BEHAVIOR


Introduction
Chapters 6 and 7 both examine what has become one of the most fashionable topics in
management over recent years – supply chain or supply network management. And
while many fashions in management decay rapidly, supply network concepts are
likely to be influential in the long term. This is because the network concept has been
particularly influential in developing our understanding of the scope and content of
strategic action. Yet, as an idea, it is not all that novel. Many authors and academics
over the last 30 or 40 years have emphasized that an organization’s success depends
on its relationships with other “actors” in its industry, whether those be suppliers,
customers, partners or collaborators. The two chapters dealing with the these topics
are (in a similar way to the capacity issue) divided into one that initially looks at
supply networks from a static perspective, concentrating on the nature of the
relationships between actors in the network. The other examines the more dynamic
behavior of supply networks as they change both in the short term and long term.


Key points
Operations strategy changes over time

   It is useful to start off by recognizing that supply network management is, of
    itself, still a controversial issue. Some people object to the term “management” in
    this context. They argue that the organization ends where its discretion ends and
    another begins. In other words, how can we manage the other actors in the
    network, they are beyond our control. Yet, even if this view is technically correct,
    it is certainly over pedantic. How can you manage anything or anybody for that
    matter? By “supply network management” we are first of all attempting to
    understand how one company’s actions are influenced by its interactions with
    other players in the network and second, thinking about how we can influence
    other players in the network towards a set of specific ends.

   Although neither chapter dwells on this issue, there is another point and a
    particularly important one, that needs to be understood. That is, supply network
    management has substantially reinforced the idea that operations management and
    strategy is an important subject. Think about it like this. At one time, in order to
    sell something to a customer, you simply extolled the virtues of the product or
    service you were trying to sell. Yet the vast majority of sales transactions (in terms
    of value at least) are from one company to another. Therefore, rather than say,
    “Buy my product or service, it’s better than anyone else’s”, it is perhaps more
    appropriate to say, “You are a business with an operation to run, I am also a
    business who runs an operation, how can my operation help your operation to run
    better?” Essentially this is an “operation-to-operation” transaction and in order to


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Operations Strategy – Student Study Guide


    make that transaction work the supplier operation must understand something
    about the customer operation. That is, in order to make a sale to another business
    you must be able to understand the operations management and operations
    strategy issues that it faces. Or put it another way, you can’t sell effectively unless
    you have the skills that enable you to analyze and understand your customers’
    operations.


Types of relationship

   Chapter 6 uses the market requirements – operations resource distinction to define
    different types of relationships. In

       Vertical integration
       Traditional market relationships
       Partnership supply relationships
       Virtual relationships

   Vertical integration has become relatively unfashionable in recent years as
    organizations have been trying to stick to what they know best and ditch other
    activities. Yet, although pure vertical integration is rarely found in modern
    business, most organizations, at the margin, are still faced the decision as to
    whether to do certain activities themselves or alternatively outsource them.
    Therefore, just because vertical integration in its extreme form is unfashionable,
    the principles and decisions behind vertical integration are an every day concern of
    most businesses.

   Traditional market supply is the polar opposite of vertical integration. It means
    relying on the market to provide goods and services as and when they are needed.
    A company which practiced traditional market supply would therefore have a
    large purchasing department that would continually be searching the market for
    the best value. Relationships will be probably short and certainly purely
    commercial.

   Partnership supply relationships are a method of trying to get the closeness of
    vertical integration without its complacency. Although partnership relationships
    have become very fashionable, Chapter 6 stresses the problems as well as the
    advantages of such relationships. It also makes the point that the level of trust
    required to maintain such relationships is often beyond the abilities (or indeed
    interests) of many organizations.

   Virtual relationships are not so much a type of supply network relationship, but
    rather a description of the extent to which a company relies on them. A pure
    virtual company has no resources of its own but buys in everything it needs. In its
    pure form one can imagine one person with a good internet connection and a
    telephone running an entire network.




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Operations Strategy – Student Study Guide


Supply Network Behavior

   One of the key points to understand about supply network behavior is that supply
    networks change over time. They always have, and they always will. In any
    particular industry sometimes the structure of supply networks changes quickly, at
    other times relationships between companies may remain stable for years. What is
    important is that any company understands when it is coming up to, or in the
    middle of, a period of change, and is able to work on the operations implications
    of that change.

   The best example of this (mentioned in Chapter 7) is the recorded music industry.
    At the time of writing it is still not clear in what way (if at all) the ability to
    download music over the Internet will change the nature and role of all the
    companies that make up the supply networks in that industry.

   The second issue of supply network behavior which it is important to understand
    is that of network dynamics. By this we mean the way that specific supply chain or
    supply networks behave in the short to medium term. There are two ways of
    thinking about this issue.

       From a quantitative point of view – understanding the bull-whip effect.
       From a qualitative point of view – soft system dynamics.

   There is a famous game, called “The Beer Game” which demonstrates this. It
    involves a “chain” of players, who initially are not allowed to talk to each other,
    placing orders on paper and moving products (barrels of beer, represented by coins
    or counters) down the line. It demonstrates how relatively small changes in market
    demand are amplified significantly further back up the chain. From an arithmetic
    point of view, this is demonstrated in the form of a simple four-stage chain in
    Chapter 7. It is worthwhile making sure that you understand the math used in this
    example. Talk to any operations manager who runs a business upstream in a
    supply chain and he or she will tell just how important this effect is.

   Often, an equally important issue is the qualitative nature of supply chain
    behavior. This is illustrated in Chapter 7 by the gaps and mismatches that occur
    between operations in a supply chain. Don’t dismiss this idea just because it is not
    demonstrated mathematically. In practice it can be equally, if not more, important
    as quantitative supply dynamics.




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Operations Strategy – Student Study Guide


Hints on answering the Astec Component Supplies case exercise

   This case is really about risk. What risks does Astec face if it turns down the deal
    from Desron or if it accepts the deal?

   The obvious way forward is to try and identify the advantages and disadvantages
    of accepting or rejecting the Desron deal. Next, try and think of how you could
    reduce the downside effects of accepting or rejecting the deal should you choose
    to do so.

   Think about how the issue of “trust” applies in this case.


Hints on answering the Zentrill case exercise

   This case is about how we can only understand the pressures on one operation by
    putting it in the context of its suppliers’ and customers’ operations.

   The case provides us with an opportunity to look for, not only the relationships
    between the three operations described, but also how upstream and downstream
    relationships affect each other.

   Use the soft supply network behavior model and its gaps to analyze the
    relationships between the players in this chain.

   In such circumstances it’s usually best to start at the demand end and work
    backwards through the chain.




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