Page 103 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Logistics and Supply Chain Management

Notes 5.1.2 Supplier Operational Integration

The next stage of development occurs when buyers and sellers begin to integrate their processes
and activities in an attempt to achieve substantial performance improvement. Such integration
typically involves alliances or partnerships with selected suppliers to reduce total cost and
improve operational integration. Such integration takes many different forms.

Example: The buyer may allow the supplier to have access to sales and ordering
information, thereby giving the supplier continuous knowledge of which products is selling.
Detailed sales information allows the supplier to be better positioned to effectively meet buyer
requirements at a reduced cost. Cost reduction occurs because the supplier has more information
to plan and can reduce reliance on cost-inefficient practices, such as forecasting and expediting.
Further operational integration can result for buyers and suppliers working together to identify
processes involved in maintaining supply and searching for ways to redesign those processes.
Establishing direct communication linkages to reduce order time and eliminate communication
errors is a common benefit of such integration. More sophisticated integrative efforts may
involve eliminating redundant activities that both parties perform.

Example: In some sophisticated relationships, activities such as buyer counting and
inspection of incoming deliveries have been eliminated as greater reliance and responsibility
are assumed by suppliers.
Many firms have achieved operational integration focused on logistical arrangements, such as
continuous replenishment programs and vendor-managed inventory. Such integration has
considerable potential for reducing TCO.
Some of the efforts in operational integration strive to reduce total cost through two-way
learning.

Example: Honda of America works closely with its suppliers to improve their quality
management. Honda visits supplier facilities and helps identify ways to increase quality. Such
improvements ultimately benefit Honda by reducing the supplier’s costs of rework and by
providing Honda with higher levels of quality materials.
The primary objective of operational integration is to cut waste, reduce cost, and develop a
relationship that allows both buyer and seller to achieve mutual improvements. Combined
creativity across organizations can create synergy that one firm, operating in isolation, would
be unable to achieve. It has been estimated that operational integration with a supplier can
provide incremental savings of 5 to 25 percent over and above the benefits of volume
consolidation.

5.1.3 Value Management

Achieving operational integration with suppliers creates the opportunity for value management.
Value management is an even more intense aspect of supplier integration, going beyond a focus
on buyer-seller operations to a more comprehensive and sustainable relationship. Value
engineering, reduced complexity, and early supplier involvement in new product design
represent some of the ways a company can work with suppliers to reduce TCO.
Value engineering is a concept that involves closely examining material and component
requirements at the early stage of product design to ensure that a balance of lowest total cost and

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