ERP systems provide integration of processes across functional areas within the organisation. SCM systems extend this integration across organisations within the supply chain. One way of looking at supply chain integration decisions is to use the technique of value-chain analysis which views the decision in terms of which set of activities (e.g. design, assembly) should be undertaken, rather than from the viewpoint of products or services. This approach allows consideration of the fact that the outsourcing of one product or service may have cost implications for other products and services which are produced
using the same resources. However, value chain analysis aims to configure activities in order to minimise cost, given a firm’s competitive strategy, and not specifically define where (i.e. inside or outside the firm) activities should occur. This decision will need to be made within the constraints of the financial resources available to the organisation in acquiring supply chain elements and the challenge of the coordination of activities within the supply chain. The different degrees of integration in the supply chain are now discussed (Figure 6.6).
Market relationships
In this relationship each purchase is treated as a separate transaction and the relationship between the buyer and seller lasts as long as this transaction takes. There can be some additional arrangements around this relationship such as the use of ES to share information, combining orders in a single delivery to reduce transportation costs, agreements on packaging standards to improve materials handling and other factors. A market relationship does have a number of advantages in that it permits flexibility in that suppliers can be changed or discontinued if demand drops or a supplier introduces a new product. Other advantages include the use of competition between suppliers to improve performance in aspects such as price, delivery and quality. However, there can be disadvantages in this arrangement in that either side can end the relationship at any time. A supplier withdrawal requires the often lengthy task of finding a new supplier. From a supplier perspective the withdrawal of a buyer may cause a sudden drop in demand on the operations facility, leading to disruption and idle resources.
Strategic partnerships and alliances
When an organisation and supplier are trading successfully they can decide to form a strategic alliance or strategic partnership. This involves a long-term relationship in which organisations work together and share information regarding aspects such as planning systems and development of products and processes. There may also be agreement on such aspects as product costs and product margins. The idea of a partnership or alliance is to combine the advantages of a marketplace relationship which encourages flexibility and innovation with the advantages of vertical integration which allows close coordination and control of such aspects as quality. Some factors may mitigate against the formation of a partnership. For instance, for low-value items the use of a partnership may not be worthwhile. Also a company may not want to share sensitive information or lose control ofa particular product or process.
The virtual organisation
The form of an organisation’s relationship within its supply chain is increasingly being affected by developments in e-business systems which can form a part of an Enterprise System. Evans and Wurster (1997) describe how information can impact the value chain in three ways:
Market relationships
In this relationship each purchase is treated as a separate transaction and the relationship between the buyer and seller lasts as long as this transaction takes. There can be some additional arrangements around this relationship such as the use of ES to share information, combining orders in a single delivery to reduce transportation costs, agreements on packaging standards to improve materials handling and other factors. A market relationship does have a number of advantages in that it permits flexibility in that suppliers can be changed or discontinued if demand drops or a supplier introduces a new product. Other advantages include the use of competition between suppliers to improve performance in aspects such as price, delivery and quality. However, there can be disadvantages in this arrangement in that either side can end the relationship at any time. A supplier withdrawal requires the often lengthy task of finding a new supplier. From a supplier perspective the withdrawal of a buyer may cause a sudden drop in demand on the operations facility, leading to disruption and idle resources.
Strategic partnerships and alliances
When an organisation and supplier are trading successfully they can decide to form a strategic alliance or strategic partnership. This involves a long-term relationship in which organisations work together and share information regarding aspects such as planning systems and development of products and processes. There may also be agreement on such aspects as product costs and product margins. The idea of a partnership or alliance is to combine the advantages of a marketplace relationship which encourages flexibility and innovation with the advantages of vertical integration which allows close coordination and control of such aspects as quality. Some factors may mitigate against the formation of a partnership. For instance, for low-value items the use of a partnership may not be worthwhile. Also a company may not want to share sensitive information or lose control ofa particular product or process.
The virtual organisation
The form of an organisation’s relationship within its supply chain is increasingly being affected by developments in e-business systems which can form a part of an Enterprise System. Evans and Wurster (1997) describe how information can impact the value chain in three ways:
- Reach – a business can share information with more stakeholders or gain a larger audience at a relatively low cost.
- Customisation – information can be more readily tailored for sharing with a large number of partners.
- Dialogue – interaction between the parties is two-way rather than the traditional push of information. For example, it is possible for a supplier to anticipate a retailer’s product requirements from examining their inventory forecast rather than awaiting a faxed order.
Thus the implication of e-business developments is that it becomes easier to outsource more and more supply chain activities to third parties and the boundaries between and within organisations become blurred. This development is known as virtualisation and companies that follow this route are known as virtual organisations. The objective is that the absence of any rigid boundary or hierarchy within the organisation should lead to a more responsive and flexible company with greater market orientation. Kraut et al. (1998) suggest that the features of a virtual organisation are:
- Processes transcend the boundaries of a single form and are not controlled by a single organisational hierarchy.
- Production processes are flexible with different parties involved at different times.
- Parties involved in the production of a single product are often geographically dispersed.
- Given this dispersion, coordination is heavily dependent on telecommunications and data networks.
E-business can also be used to alter the supply chain structure by bypassing some of the tiers using a process known as ‘disintermediation and re-intermediation’, the creation of new intermediaries between customers and suppliers in the supply chainVertical integration Complete integration is achieved by an organisation when it takes ownership of other organisations in the supply chain. The amount of ownership of the supply chain by an organisation is termed its ‘level’ of vertical integration. When an organisation owns upstream or supply-side elements of the supply chain is termed ‘backward vertical integration’. Ownership of downstream or demand-side elements of the supply chain is termed ‘forward vertical integration’ (see Figure 6.7).
There are a number of factors that need to be taken into account when deciding the amount of vertical integration that is appropriate for an organisation. First, the amount of vertical integration that can feasibly be undertaken will be dependent on the financial resources of the organisation. It is unlikely that smaller firms will be able to own large sections of the supply chain, but even large organisations may find this difficult. For example, a car manufacturer may source an engine for a new car from a third party rather than invest millions of euros in developing a new design. Apart from cost, the time taken to acquire supply chain capabilities may be a barrier. It may also be felt that resources used for vertical integration could be better spent elsewhere (R&D or marketing for example).
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