The Supply Base

In a typical supply network, many decisions are made that are outside the managerial piuwiew of specific buyers. For example, supplier X may decide to use a different raw material supplier or it may adopt a new manufacturing process neither of these changes may be known to the company that buys from X. At the same time, there are other suppliers that are closely mOTiitored by the buyer, and this group of suppliers is known as the supply base of the buyer, as shown in Fig. 4.6. These suppliers are interrelated through the flows of materials, services, information, and cash. 

The performance metrics of such a supply base includes transaction cost, supply risk, supplier responsiveness, and suppher innovation (Choi and Krause 2006). These performance measures are largely determined by the architectural characteristics of the supply base and include, supplier diversity, number of suppliers in the base, and the linkages between suppliers, as shown in Fig. 4.7. 

---

Alongside the increase in the supply base, the market for organic produce has also grown significantly, but statistics on the overall size of the market for organic produce in Europe are still very limited (Hamm etal, 2002). Some recent estimates have suggested that the retail sales value of the European market for organic food was of the order of EUR 8-10 billion in 2000 (ITC, 2001). 

How many suppliers does your comparer have For an example, an automobile compaity can have as maity as 50,000 suppliers. Think about the vastness of the task of managing all of these suppliers and getting the performance that your business requires. This is where a supply base reduction may be required to help get the supply base to a manageable level. There are maity benefits to an effective supplier management system. Some of these are better supplier performance on the critical characteristics for your operation, lower costs, lower inventories, less obsolete materials, quicker response to your customer needs, and good relationships with the suppliers. 

The ability of suppliers to have a portfolio of customers enables flexibility of the supply base to absorb downturns in individual OEM volumes, thus providing the capacity adjustment flexibility for the OEMs. In addition, the ability for the base of smaller companies to easily adjust their production capacity by working longer hours and so on provides the ability to rapidly adjust upwards to demand increases. 

For all but the simplest companies, managers will soon face the realities shown in Figure 6.2. There are many product variations the supply base is complex and markets are not monolithic but have multiple segments that have different requirements. One client found, after making the assessment, that they were doing well with one set of customers, but poorly with others. The idea that there are spheres or businesses within the business has proven to be an important contribution of the Handbook s first edition. In this edition, we introduce it in this chapter because it is important to effectively linking to the customer. Chapter 9 describes options in more detail. 

Our conclusion is that DFT techniques must move back into the supply chain to have the greatest impact. Dealing with final assembly, particularly in a complex supply chain, is the tip of the iceberg. The roots should spread backward into the supply base to have the greatest impact. This also includes design for commonality to maximize the potential for postponement. 

One of the major effects of the Internet on supply chain practices is in the area of procurement. Firms now utilize the Internet not only to diversify the supply base and hedge the risk but also to obtain lower costs through auctions. Several new firms such as FreeMarkets have built their business model around business-to-business supply auctions. Several other firms like Ariba and Com-merceOne have added auction capabilities to their product suite. In this section we present several papers that address important issues related to supply chain management... 

Application of this model leads to a reduction in the munber of production facilities, as well as the centralisation and relocation of production and distribution centres, the design of new distribution systems and the consolidation and downsizing of the supply base. Within internal integration, G. Stock, N. Greis and J. Kasarda (2000, p. 534) defined vertical... 

Governance type Complexity of transactions Ability to codify transaction Capabilities in the supply -base Degree of power asymmetry in the supply chain... 

In terms of the five supply chain levels being considered, the first two are a time during which those in procurement seeking improvement leverage volume for price concessions. The supply base is reduced and volumes are awarded to fewer suppliers for better prices. Attention is also given to better order management procedures and the means to reduce transportation costs. 

The sector involving high supply risk and low impact on performance is again labeled bottleneck to reflect the need to make certain a lack of supply does not disrupt efficient production and delivery. This is a typical Level 3 circumstance where there is high buyer dependence on the suppliers, but the procurement function has worked the supply base down to those companies where a degree of reliability exists. Alternative sources are advisable because even the best of sources can encounter trouble. A... 

Sometimes a consolidation of the supply base happens through merger and acquisition. Since the rate of merger and acquisition has increased so dramatically over recent years, it follows that the supply base reduction will have accelerated for this reason alone. 

If a company grows through a merger or acquisition, network re-design addresses rationalization of the supply base, elimination of redundancies, and use... 

The size of the supply base has a major impact on its performance. For example, a reduction in the number of suppliers in the supply base causes the purchase... 

The buyer s risk increases if one or more suppliers acquire the technological knowledge of the buyer, as those suppliers now becomes potential competitors. Thomson Consumer Electronics, a supplier of JVC, eventually moved into the JVC s market space as a competitor after acquiring the technologies from JVC (Bleeke and Ernst 1995). In additirai, if the technologies that suppliers bring to the supply base are critical for the buyer, the suppliers may threaten to hold it back it becomes a structural risk for the buyer. 

Thus both the differentiatiOTi and relationship dimensions can increase the difficulty in coordinating with the supply base, increasing the probability of undesirable events occurring. Indeed, close relationships among suppliers in the supply... 

Supplier responsiveness can increase in the size the supply base because a larger supply base increases the competitive pressure on suppliers, causing them to be more responsive. At the other extreme, a close relationship between the buyer and its suppliers also motivates supplier responsiveness (Liker and Choi 2004). Therefore, optimal supplier responsiveness can be achieved with a supply base that is neither too large nor too small. It follows that by working with a limited number of preferred suppliers the buyer can be more effective in communicating its needs and can better induce the suppliers to be responsive. 

It may also prevent the use of more cutting edge technologies from other suppliers. Differentiation between the suppliers in the supply base is reduced, buyer can easily substitute one supplier with another, increasing the supplier s risk conversely, increased supplier differentiation increases the buyer s risk. 

In choosing suppliers to be included in the supply base, the buyer needs to be concerned about not only the transaction costs but also the long term strategic fit. Typically the buyer identifies, evaluates, and contracts with suppliers. Unreliable suppliers, in terms of quality and fulfillment, increase the buyers cost. In many cases, because of the suppliers capacity constraints, the buyer may need to allocate its purchase order to more than one supplier. 

---