Lesson-6

1.      Given the complexities and risks involve with supply chains, might it make sense for a business to vertically integrate and be its own supply chain? Discuss the pros and cons of this approach.

The degree to which a firm owns its upstream suppliers and its downstream buyers is referred to as vertical integration. It can have a significant impact on a business unit’s position in its industry with respect to cost, differentiation, and other strategic issues. Vertically integrated supply chains occur when two or more organizations or businesses at various stages of production merge for the common purpose. The main purpose of vertical integration is to enhance the overall efficiency and to reduce costs all throughout the supply chain, thus improving business competitiveness and profitability. Let’s discuss about its pros and cons as follows:

Pros:

1.      It enables the businesses to invest in greatly specialized assets: With highly specialized assets, it is possible to invest and develop the products or services that differentiate it from its competitors so that it can increase share within the market, leading to business profits.

2.      Lower costs of Transactions: It is certainly true that when there will be less number of transactions then there will be also less transaction costs.

3.      High certainty when it comes to quality: Since the subsidiary company has a quality control system, then there is more possibility to produce high standard products.

4.      Lead to expansion of new or core competencies: Vertical Integration increase the chance of developing new core competencies for business organizations.

Cons:

1.      Capacity balancing problems: There could be a conflict in regard to its capacity balancing. This may lead to retaliation from the business’ previous suppliers that can potentially endanger the production.

2.      Decreased Flexibility: It may reduce the flexibility because of the downstream or upstream investments that the business will make.

3.      Sometime it may create some barriers to market entry: A manufacturer sometimes control access to crucial components or the raw materials that are scarce through vertical integration.

4.      Increased bureaucratic costs: It is possibly can increase the bureaucratic costs that may result in loss of business organizations.

References

Russell & Taylor. (2011). Operations Management: Creating Value Along The Supply Chain. USA: JOHN WILEY & SONS.INC.

Stevenson, W. J. (2015). Operation s Management. Penn Plaza, New York: McGraw- Hill Education.

(n.d.) Retrieved August 7, 2015 from http://occupytheory.org/advantages-and-disadvantages-of-vertical-integration/

2.       Under what conditions would a plant manager elect to use a fixed-order quantity model as opposed to a fixed-time period model? What are the disadvantages of using a fixed-time period ordering system?

                                                    

Fixed-Order-Interval (FOI) model is a process of placing an order at fixed time intervals such as weekly, twice a month, monthly. Fixed ordering system is very useful in retail businesses such as drugstores, small grocery stores where demand is variable and order size tends to vary from cycle to cycle. On the other hand, in fixed-order-quantity (FOQ) model, the order size basically remains fixed from cycle to cycle while the length of the cycle varies. For example, if demand is above average, the shorter length it will be and vice-versa.

Under the condition of demand time variability, a plant manager elects to use a fixed-order quantity model as opposed to a fixed-time period model. It also can be used when there are certain deliveries commitments that need to be made for final products in order to meet the production commitment. There are some disadvantages of using a fixed-time period ordering system are as follows:

·         It requires a larger amount of safety stock for a given risk of stockout because it is necessary to protect against shortages during an entire order interval plus lead time.

·         It may increase the carrying costs, and there are also the costs of the periodic reviews.

References

Russell & Taylor. (2011). Operations Management: Creating Value Along The Supply Chain. USA: JOHN WILEY & SONS.INC.

Stevenson, W. J. (2015). Operation s Management. Penn Plaza, New York: McGraw- Hill Education.

3.      Discuss the general procedure for determining the order quantity when price breaks are involved. Would there be any differences in procedures if holding costs were a fixed percentage of price rather than a constant amount?

Answer:

The procedure for determining the overall order quantity differs slightly, depending on given cases. First, when price breaks are given or carrying costs are constant then procedure is as follows:

1.      First, we need to compute the common minimum point.

2.      Only one of the unit prices will have the minimum point in its feasible range since the ranges do not overlap. Identify that range.

3.      If the feasible minimum point is on the lowest price range, that is the optimal order quantity. However, if the feasible minimum point is in any other range then we must compute the total cost for the minimum point and for the price breaks of all lower unit costs.

4.      We have to compare the total costs, and the quantity that yields the lowest total cost is the optimal order quantity.

Similarly, when holding costs are expressed as a percentage of prices, then there would be a little bit differences to consider. We need to determine the best purchase quantity with the following procedure:

1.      Beginning with the lowest unit price, we have to compute the minimum points for each price range until you find a feasible minimum point(i.e. until a minimum point falls in the quantity range for its price).

2.      If the minimum point for the lowest unit price is feasible, it is the optimal order quantity. If the minimum point is not feasible in the lowest price range, compare the total cost at the price breaks for all lower prices with the total cost of the feasible minimum point. The quantity that yields the lowest total cost is the optimum.

References

Russell & Taylor. (2011). Operations Management: Creating Value Along The Supply Chain. USA: JOHN WILEY & SONS.INC.

Stevenson, W. J. (2015). Operation s Management. Penn Plaza, New York: McGraw- Hill Education.

4.What are characteristics of efficient, responsive, risk-hedging, and agile supply chains? Can a supply chain be both efficient and responsive? Risk-hedging and agile? Why or why not?

A supply chain is the sequence of organizations-their facilities, functions, and activities-that are involved in producing and delivering a product or service (Stevenson, 2015). The major characteristics of efficient, responsive, risk-hedging, and agile supply chains are as follows:

·         Efficient supply chains:

-          Focus on cost efficiency

-          Initiatives: eliminate non-value adding activities, pursue scale economies, and optimize capacity utilization and implementation efficient information transmission.

·         Responsive Supply Chains:

-          Focus on flexibility in responding to customer needs

-          Initiatives: Postponement, build-to-order process, mass customization, information sharing and ensuring order accuracy.

·         Risk-hedging Supply Chains:

-          Focus on pooling and sharing resource across the supply chain

-          Initiatives: Increased safety stocks, multiple suppliers for critical components and real-time sharing of inventory and demand information.

·         Agile Supply chains:

-          Hybrid of responsive and risk-hedging strategies

-          Implement strategies that allow flexibility in response to changing customer needs and pool inventory and other resources to mitigate shortages and supply disruptions.

A Company can be both efficient and responsive because products or services can be delivered to its customers quickly just by charging nominal fees. On the same way, they can be both risk-hedging and agile too since it tries to reduce the risks by hedging.

References

Lee, H. L. (2002). Aligning Supply Chain Strategies. California Management Review , 105-119.

Russell & Taylor. (2011). Operations Management: Creating Value Along The Supply Chain. USA: JOHN WILEY & SONS.INC.

Stevenson, W. J. (2015). Operation s Management. Penn Plaza, New York: McGraw- Hill Education.