Supply chain
Along the journey from raw material to finished item in the hands of a consumer,
every business needs an efficient supply chain. Supply chain management involves
different organizations, people, activities, and resources to take, for example,
grains of corn from a field to a finished box of cornflakes on the consumer’s
breakfast table. The company may outsource parts of the chain to other firms.
It may also send some activities, typically administrative functions, offshore.
Supply chain management
The traditional supply chain takes raw materials and
resources through to a finished product for the consumer.
The company has to manage costs and ensure standards,
being particularly careful that it does not harm people or
Manufacturer
Organizations bring resources
together to manufacture goods,
often near the customer.
Supplier and processor
The raw materials are processed,
often near their source.
Raw materials and resources
Whether from a field or a mine, raw
materials start somewhere.
the environment along the way, from fair wages for labor
at the source to recyclable packaging after consumption.
Supply chain is big business—in the US, 4.2 million people
are employed in warehousing and transport alone.
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how operations and production work
Supply chain
$688
billion
the cost of supply
chain transportation
in the US, in 2009
Adding value Companies may try to add value along
the chain, rather than just seeing it as a way to transport
a product from A to B. See pp.324–325.
Delegating functions To save money and use
specialized expertise, the business can outsource
activities and/or have them done by local companies or
a branch of its own company offshore. See pp.326–329.
Returning goods Part of the supply chain involves an
efficient system for dealing with goods returned by the
consumer. See pp.330–331.
Competitive edge At every stage, the company
compares its performance with its competitors to see
how it can improve. See pp.332–333.
Ethics and the environment Taking responsibility for
avoiding pollution and protecting workers’ rights is part
of the package. See pp.334–335.
Consumer
The consumer enjoys the finished
product, and ideally recycles
the packaging.
Retailer
The store displays the products for
maximum appeal to the consumer.
Distribution
Finished goods are transported to
storage depots or retailers.
EXTENDING THE CHAIN
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how operations and production work
Supply chain
$688
billion
the cost of supply
chain transportation
in the US, in 2009
Adding value Companies may try to add value along
the chain, rather than just seeing it as a way to transport
a product from A to B. See pp.324–325.
Delegating functions To save money and use
specialized expertise, the business can outsource
activities and/or have them done by local companies or
a branch of its own company offshore. See pp.326–329.
Returning goods Part of the supply chain involves an
efficient system for dealing with goods returned by the
consumer. See pp.330–331.
Competitive edge At every stage, the company
compares its performance with its competitors to see
how it can improve. See pp.332–333.
Ethics and the environment Taking responsibility for
avoiding pollution and protecting workers’ rights is part
of the package. See pp.334–335.
Consumer
The consumer enjoys the finished
product, and ideally recycles
the packaging.
Retailer
The store displays the products for
maximum appeal to the consumer.
Distribution
Finished goods are transported to
storage depots or retailers.
EXTENDING THE CHAIN
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Porter’s value chain
Primary activities work directly to
create or deliver a product or service,
while support activities help to improve
their efficiency. To apply the value
chain, a company has to identify each
activity and either lower its cost or
differentiate it from its competitors
to add value in the customer’s eye.
How it works
Harvard Business School professor Michael Porter first
introduced the concept of a value chain in his book
Competitive Advantage. Most organizations have
dozens—possibly hundreds—of activities along the
supply chain in the process of converting raw materials
(inputs) to products or services (outputs). These can
be classified generally as either primary or support
activities that all businesses must undertake. The idea
of the value chain is that how activities are organized
and carried out determines a company’s costs and
thus its margin (profit). Each link of the chain must
communicate to other departments clearly and
promptly. For example, marketing and sales must make
accurate sales forecasts and pass them on in time for
procurement to buy the correct type and quantity of
raw materials, who in turn must connect with inbound
logistics so they can organize receipt of goods.
Value chain
Rather than looking at the supply chain as merely a series of activities,
organizations are increasingly looking at how value is created by each
stage of the process. Lowering costs or raising performance are key.
Pizza Hut’s value chain
Pizza Hut’s greatest asset is breaking
down complex pizza-making into
simple steps unskilled chefs can do.
Inbound logistics Vast global
purchase orders for ingredients
Operations Target countries
with a liking for Italian food, on a
franchise model with local staff
Outbound logistics In-house
meals and home delivery service
Marketing Differentiate from
other pizza chains
Service Delicious, convenient
pizzas at a fair price
CASE STUDY
Inbound logistics
Involves relationships
with suppliers,
including all activities
to receive, store, and
allocate inputs
Operations
Activities required
to transform inputs
into outputs
SUPPORT ACTIVITIES
Although not directly involved in outputs,
these support primary activities, improving
their efficiency and successful function.
PRIMARY ACTIVITIES
Each department must cooperate and
provide necessary information between
value-chain activities to make a profit.
Company infrastructure
Human resource
management
Technology development
Procurement
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how operations and production work
Supply chain
$1.93
trillion
the internet value chain
revenue in the US, in 2008
ONLINE VALUE CHAIN
More than a quarter of the world’s population uses
the internet for everyday activities, from shopping
and banking to sharing photos and watching TV.
To handle this volume, a complex value chain
delivers internet services, made up of global and
local firms with assets as diverse as content rights,
communications and IT infrastructure, proprietary
software, and global brands.
Outbound logistics
Activities required to
collect, store, and
distribute the output
Marketing and sales
Activities that inform
buyers, encourage
purchase, and facilitate
transaction
PROFIT MARGIN
Profit equals the
customer’s willingness
to pay more than the
sum of all the activities
in the value chain.
Service
Activities to keep
product working
effectively for buyer
after it is received
Functions such as accounting, legal, finance, planning,
public affairs, and quality assurance
People activities: recruiting, hiring, training, developing,
compensating, and terminating
Equipment, hardware, software, procedures, and technical
knowledge used in transformation of inputs into outputs
Acquisition of inputs (raw materials) for the company
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how operations and production work
Supply chain
$1.93
trillion
the internet value chain
revenue in the US, in 2008
ONLINE VALUE CHAIN
More than a quarter of the world’s population uses
the internet for everyday activities, from shopping
and banking to sharing photos and watching TV.
To handle this volume, a complex value chain
delivers internet services, made up of global and
local firms with assets as diverse as content rights,
communications and IT infrastructure, proprietary
software, and global brands.
Outbound logistics
Activities required to
collect, store, and
distribute the output
Marketing and sales
Activities that inform
buyers, encourage
purchase, and facilitate
transaction
PROFIT MARGIN
Profit equals the
customer’s willingness
to pay more than the
sum of all the activities
in the value chain.
Service
Activities to keep
product working
effectively for buyer
after it is received
Functions such as accounting, legal, finance, planning,
public affairs, and quality assurance
People activities: recruiting, hiring, training, developing,
compensating, and terminating
Equipment, hardware, software, procedures, and technical
knowledge used in transformation of inputs into outputs
Acquisition of inputs (raw materials) for the company
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How it works
Outsourcing grew in the 1980s because firms looked to
save costs by contracting peripheral business activities
to third parties. But outsourcing today is no longer
just about cost savings. It is a strategic tool that is
increasingly important in the global economy in the
21st century. Firms may choose outsourcing for
elements of the production process, for support
Outsourcing
functions such as
accounting, or because they do
not have the specialized
knowledge or skills within
the organization. Outsourcing may be to a firm in the
same country or it may be to an organization in another
country. Rapid expansion of logistics networks and
information technology has made it easier to outsource,
thus accelerating the growth of outsourcing over the
last decade.
Firms may choose to pay outside suppliers to do work rather than
complete the tasks internally. Handing over part or all of production
or a service to a third party increases flexibility.
Top reasons for outsourcing
Growth and success for many businesses is underpinned
by outsourcing, as a number of firms ask: why do it
ourselves, if another firm can do it faster, better, or cheaper?
Organizations recognize that using external capabilities,
capacities, knowledge, and skills opens opportunities. Some
firms now focus only on their core business; in a global survey,
this was cited as one of the top reasons for outsourcing.
13%
Improve quality
External organization paid
for delivering a quality
product or service
36%
Lower costs
External provider often benefits
from economies of scale
36%
Focus on core business
Firm can identify and prioritize
its primary activity
100
90
80
70
60
Companies surveyed (%)
50
40
30
20
10
0%
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How operations and production work
Supply chain
90%
of firms
worldwide say
outsourcing is
crucial to growth
strategies
EXAMPLES OF BUSINESS TASKS THAT CAN BE OUTSOURCED
Outsourcing Subcontracting work
to another company or buying in
components for a product rather
than manufacturing them
Offshoring Practice of moving
a company’s operating base to a
foreign country where labor costs
are cheaper
Network structure Tasks or
operations are performed by
another company—which may be
in the same country, a neighboring
country, or overseas—within a
network structure of organizations
NEED TO KNOW
1%
Save capital
Frees up capital to invest in
areas for growth
4%
Encourage innovation
Frees up internal capability and
buys in knowledge
and ideas
10%
Increase speed
to market
External expertise
often brings shorter
lead times
REASON
CORE
BUSINESS
Web
design
Computer/
IT support
Research and
development
Manufacturing
Healthcare
services
Customer
support
Tax
preparation
Logistics
Accounting
Payroll
Legal
services
Engineering
Outsourcing certain tasks within a
business enables focus to remain
on core business activities, which
helps generate growth as well as
income. Some tasks are better
suited to outsourcing than others
due to factors including expertise,
how time consuming a task is, and
how much face-to-face time it
requires. IT operations, for
example, can be highly expensive,
requiring expert knowledge and
can easily be managed remotely.
Human resources, however, is
more employee focussed, so
better suited to in-house.
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