Page 85 - DMGT525_MATERIALS_MANAGEMENT

Materials Management

Notes external networks, including suppliers, complement its internal capabilities in the pursuit of
offering products and services at competitive prices and quality.
The processes involved in the analysis of the external supply chain are similar to that of the
internal supply chain. Therefore, by understanding the internal supply chain, it is relatively
easy to extend the concept of the analysis to the external supply chain. Extending this analysis,
and then including the internal supply chain in the analysis, is an important step in the
development of supply chain management. In this composite picture there are multiple
organizations involved and their representatives are now also participating and a part in the
analysis.

However, the extension of the analysis to the external supply chain from the internal supply
chain adds a greater level of complexity. Considering that the task is enormous, most
organizations focus their efforts on those supply chains that are most important to their success.
An organization, therefore, has to determine which linkages need to be considered as important.
The most significant opportunities for improvement in a supply chain are often at the interfaces
between the various supply chain member organizations. An example is cross-docking applied
to warehousing which can improve the efficiency of transportation as well as reduce the costs of
warehousing and inventory. There are numerous such opportunities at the different interfaces.
Identifying and implementing these opportunities provides a challenge to supply chain managers.

Internal or External Solutions

The costs that must be considered when investing in and using internal or external solutions to
the supply chain include not only the cost of running and maintaining the systems, but also the
cost of purchasing and implementing the functionalities (transition cost) e.g. linking internal
processes or systems to the supplier.
In addition to these costs, which can be measured relatively easily, the firm must also consider
the opportunity cost of not running efficient supply chain processes. This cost is termed
competitive cost. The competitive cost can be thought of as the opportunity cost of using
inefficient (relative to the firm’s competitors) supply chain processes for serving customers and
suppliers.
Lastly, the firm should realize a long-term benefit from the acquisition of capabilities (salvage
value). The salvage value reflects the benefit the firm realizes from building long-term capabilities
either internally or externally. The benefits derived from this are reflected in a decrease in the
competitive and/or the running and maintenance costs.
The firm’s decision has to be one that seeks supply chain efficiencies through internal capabilities,
through the participation of external supply chain members, or through a combination of both.

Self Assessment

Fill in the blanks:
5. In ………………. companies that have globalized operations, the internal part of a supply
chain often has multiple links that span the globe.

6. The …………. reflects the benefit the firm realizes from building long-term capabilities
either internally or externally.
7. A supply chain consists of ……………. components required to transform ideas into
delivered products and services.

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