Question 3
Supply chain management is the vital business function that coordinates and manages all the
activities of the supply chain linking suppliers, transporters, internal departments, third-party
companies, and information systems. Also, supply chain management provides the company with a
sustainable, competitive advantage, such as quick response time, low cost, state-of-the-art quality
design, or operational flexibility. Dell Computer Corporation is a good example of a company using
its supply chain to achieve a sustainable competitive advantage.
Following this line of thought, answer the following questions:
1. Discuss the three components of a company’s supply chain structure, namely, external suppliers;
internal functions; and external distributors.
Components of a Supply Chain for a Manufacturer
A company's supply chain structure has three components: external suppliers, internal
functions of the company, and external distributors.
External suppliers include the dairy farmer, cardboard container manufacturer, label
company, plastic container manufacturer, paper mill, chemical processing plant, lumber
company, and chemical extraction plant. Internal functions include the processing of the raw
milk into consumer dairy products and packaging and labelling dairy products for distribution
to retail grocery outlets. The external distributors transport finished products from the
manufacturer to retail grocers, where the products are sold to the customer. The supply
chain includes every activity from collecting the raw milk, producing the consumer dairy
products, packaging the dairy products, distributing the packaged dairy products to retail
grocers, to selling the finished dairy products to the customer.
Let's look at each component of the supply chain in detail.
External Suppliers
Dairy products manufacturing involves several companies. The dairy products are
packaged either in cardboard or plastic containers made by tier one suppliers. Note that any
supplier that provides materials directly to the processing facility is designated as a tier one
supplier (in this case, the dairy farm, the cardboard container manufacturer, the label
company, and the plastic container manufacturer). The paper mill and the chemical
processing plant are tier two suppliers because they directly supply tier one suppliers but do
not directly supply the packaging operation. The lumber company that provides wood to the
paper mill is a tier three supplier, as is the chemical extraction plant that supplies raw
materials to the chemical processing plant.
Companies put substantial effort into developing the external supplier portion of the supply chain
because the cost of materials might represent 50–60 percent or even more of the cost of goods
sold. A company is typically involved in a number of supply chains and often in different roles. In the
supply chain for the plastics container manufacturer, the chemical plant is now a tier one supplier
and the chemical extraction facility is a tier two supplier. Even though the plastics container
manufacturer was a tier one supplier to the milk processing facility, the plastic container
manufacturer still has its own unique supply chain. Now consider the supply chain for a retail
grocer: the tier one suppliers are providers of packaged consumer products, and the grocer has no
external distributors because the customers buy directly from the store. As you can see, supply
chains come in all shapes and sizes.
Remember that tier one suppliers (the cardboard container manufacturer, dairy farm, label
company, and plastics container manufacturer) directly supply the consumer product
manufacturer (packaged dairy products), whereas tier two suppliers (paper mill and
chemical processing plant) directly supply tier one suppliers. To summarize: supply chains
are a series of linked suppliers and customers in which each customer is a supplier to
another part of the chain until the product is delivered to the final customer.
Internal Functions
Internal functions in, for example, a dairy products supply chain are as follows:
• Processing, which converts raw milk into dairy products and packages these products for
distribution to retail grocery outlets.
• Purchasing, which selects appropriate suppliers, ensures that suppliers perform up to
expectations, administers contracts, and develops and maintains good supplier
relationships.
• Production planning and control, which schedules the processing of raw milk into dairy
products.
• Quality assurance, which oversees the quality of the dairy products.
• Shipping, which selects external carriers and/or a private fleet to transport the product
from the manufacturing facility to its destination.
External Distributors
External distributors transport finished products to the appropriate locations for eventual
sale to customers. Logistics managers are responsible for managing the movement of
products between locations. Logistics includes traffic management and distribution
management. Traffic management is the selection and monitoring of external carriers (trucking
companies, airlines, railroads, shipping companies, and couriers) or internal fleets of carriers.
Distribution management is the packaging, storing, and handling of products at receiving docks,
warehouses, and retail outlets.
(10 Marks)
2. Explain how Dell Computer Corporation is using its supply chain to achieve a sustainable
competitive advantage.
A prime example of operations management (OM), supply chain management provides the company
with a sustainable, competitive advantage, such as quick response time, low cost, state-of-the-art
quality design, or operational flexibility.
Dell Computer Corporation is a good example of a company using its supply chain to achieve a
sustainable competitive advantage. Quick delivery of customized computers at prices 10–15 percent
lower than the industry standard is Dell's competitive advantage. A customized Dell computer can be
en route to the customer within 36 hours. This quick response allows Dell to reduce its inventory
level to approximately 13 days of supply compared to Compaq's 25 days of supply. Dell achieves
this in part through its warehousing plan. Most of the components Dell uses are warehoused within
15 minutes travel time to an assembly plant. Dell does not order components at its Austin, Texas,
facility; instead, suppliers restock warehouses as needed, and Dell is billed for items only after they
are shipped. The result is better value for the customer.
Dell succeeded early on because they were running a lean operation. In the 1980s when
Dell started selling directly to consumers, they only placed orders for parts as customers
made purchases. Rather than stock a warehouse full of pre-assembled computers, Dell
reduced their costs and cut lead times and eventually became a well-known name Dell
in their industry.
Important Factors to Dell’s Success:
Dependable suppliers with the ability to meet Dell’s demanding lead time requirements.
A seamless system that allows Dell to transmit its component requirements so that they
will arrive at Dell in time to fulfill its lead times.
A willingness of suppliers to keep inventory on hand allowing Dell to be free of this
responsibility
Therefore, the principles of JIT need to be adopted by all members of a supply chain in
order to have a full impact. This is often referred to as a lean supply chain. Dell provides a
good example of the impact JIT can have when it is implemented along the supply chain.
The company has a build-to-order model that produces computers only when there is actual
customer demand.
(10 Marks)
(TOTAL: 20 Marks)