Supply of Goods and Services

Supply Chain Strategy

When it comes to companies sharing business relationships, and occasionally shareholdings, as well, a Keiretsu network is often the best way to integrate and manage that group of companies (Jacoby, 2009). In that way, the relationship between the businesses becomes a partnership instead of only that of buyer-seller (Jacoby, 2009). There are many long-term benefits of this type of network, and these benefits could be carried over to the new company that builds power tools. The Keiretsu network will allow strong relationships to be created with suppliers, and that will help lower the costs of manufacturing (Heizer & Render, 2010; Nagurney, 2006).

These lowered costs are very important, as is the lean manufacturing that can be created through proper coordination with various suppliers (Heizer & Render, 2010). However, there is some risk to the Keiretsu network in that the closeness of all the companies may make shopping around for the lowest price and best value on raw materials more difficult (Oliver & Webber, 1992). Despite this concern, there are added benefits such as quality, loyalty, and dependability that will, over the long-term, make up for any perceived loss of value due to the potential of paying slightly higher prices (Jacoby, 2009).

There are other options for the power tool company, but not all of them would be practical choices. For example, vertical integration would not work well because the company would be required to purchase either a supplier or a number of suppliers who could offer the electronic and electrical components that would be needed for the power tool development and creation. With a new company, there is no demand for the product yet. Such is the case with these power tools, so the demand for the tools would not be great enough to make purchasing a raw material company worth the price. Most likely, doing that would cause the company to fail due to financial difficulties.

Buying raw materials from a supplier that is already established makes much more financial sense. The costs will be lower and the products can be produced much more efficiently (Heizer & Render, 2010). That adds a lot of value for the company, the companies that work with it, and the end users (consumers). It is very important to find the best fit for any company that is just starting up and that will need to work with suppliers and other companies in order to be successful (Oliver & Webber, 1992; Jacoby, 2009). For example, another strategy that could be considered but that would also be ineffective in the long run would be that of a virtual company.

Virtual companies use technology and the internet to create and develop partnerships. They look for manufacturers, suppliers, and distribution companies that do not have brick-and-mortar facilities (Oliver & Webber, 1992). However, since the company is making a tangible product that cannot be created in cyberspace, and it also plans to have its own production facility that it owns and operates, there is no place for it to be a virtual company. As it manages more components of the supply chain, it will need even more brick-and-mortar locations and space. Trying to start out virtually would make things much more difficult in the future, and not allow the company to get off the ground properly.

B. Metrics

After the supply chain has been put in place, there are metrics that have to be addressed in order to make sure the chain is performing properly (Heizer & Render, 2010; Nagurney, 2006). There will be standards set by the power tool company, and if these are not being met that issue needs to be corrected as soon as possible so the company can move forward. The first one of the metrics that the company will use to measure how well its supply chain performs is how well the suppliers follow the just-in-time (JIT) manufacturing schedule. If they cannot adhere to the schedule, there will be problems, so the company has to be able to trust them.

When a company uses a JIT schedule for its supply chain, the materials have to arrive right when they are supposed to (Jacoby, 2009). Getting them to the company too early means they will have to be stored. Often, these companies do not have space for the items to be stored in, and that can result in having them stored off site (Oliver & Webber, 1992). There are, of course, costs associated with storage no matter where the company has to store the items, so it is very important that they arrive only when they are needed. That way they can move right into the supply chain and will not be sitting around waiting.

Of course, it is also very important that the materials do not arrive too late. That can leave workers sitting around with nothing to do, and can also mean that customers will lose out on getting the products from store shelves when they want and need them (Heizer & Render, 2010; Nagurney, 2006). That can be very bad for the company, and lead to a reputation that will be unfavorable. Word of mouth spreads quickly, so it is vital that a company does all it can to make sure its supply chain operates smoothly to keep everyone happy. In order to measure this particular metric properly, both delivery receipts and delivery schedule records must be accurately kept.

Another metric to be measured is the cost of the materials the company receives (Heizer & Render, 2010). If the costs are higher than what was quoted by the supplier, or if the costs are higher than what the company can get for the same thing at a different supplier, the company could lose money. These costs will be carefully tracked. Because the company will adopt a Keiretsu network, it will not be moving back and forth between several suppliers. The materials may be cheaper somewhere else occasionally, but that is to be expected. What the power tool company really wants to look at is the price over time. Consistently higher quality and lower prices at another supplier can mean that a new supplier will eventually be chosen so that the company is better able to save money and cut costs.

Additionally, the power tool company has to be mindful of the percentage of material it gets from suppliers that it has to reject. It there is a lot of rejected material seen in the supplies that are received, and this happens on a consistent basis, the company will lose money. Each time supplies are received that are poor quality and have to be sent back, the company must record this information. Good quality materials must be used (Oliver & Webber, 1992; Jacoby, 2009). If they are not, the new power tool company will end up putting out inferior products that people will not want to buy or that they will return because they do not like them. That can lead the company to have a bad reputation that will hurt them financially.

Material orders and their accuracy also matter as a metric. Any orders that are not exactly the way they were requested will have to be recorded. Having a supplier run out of material would be an equally distressing problem, and the entire manufacturing process would have to be shut down if that occurred, so it must be tracked and recorded, as well. Additionally, the company must consider a metric that will provide an inventory turnover ratio. That will be determined by the cost of the goods that are sold divided by the investment the company has made in the inventory.

C. Issues

Local optimization is a very important issue when it comes to proper supply chain integration (Heizer & Render, 2010; Oliver & Webber, 1992). When supply chain members make decisions that they base on limited knowledge, local optimization occurs (Oliver & Webber, 1992). This can be a problem because they do not have all the facts and information regarding supply and demand. That can cause them to either overcompensate or under compensate orders (Heizer & Render, 2010). Having too much inventory or running out of inventory are the two most common results of local optimization, and both of those can come about from a desire to minimize the losses and maximize the profits of a company based on information that is too limited in scope (Heizer & Render, 2010).

There are other issues, however, that have to be considered. One of those is the incentives that are used in order to drive sales (Heizer & Render, 2010). When quantity discounts are given or promotions are used, merchandise can sometimes be manufactured in anticipation of the larger demand. If that larger demand then fails to materialize, there can be serious repercussions all along the supply chain (Heizer & Render, 2010). The same is true of shipping larger lots that have been produced in an effort to keep the unit cost lower. Doing this fails to accurately reflect the actual sales numbers, and can give false information to the supply chain that can become problematic later (Heizer & Render, 2010; Nagurney, 2006). The negative effects seen by doing this means problems all throughout the supply chain and costs that will increase (Heizer & Render, 2010).

D. Concepts and Methods

Having good communication at every level of the supply chain is the most important thing the company can do. This should be the first step, as it will help to ensure that supply chain management is integrated and effective. There are specific methods to use in order to create good communication, such as Collaborative Planning, Forecasting, and Replenishment (CPFR). (Heizer & Render, 2010). That allows all the members of the supply chain to share plenty of good information so they are better able to manage their inventory through collaboration with one another (Heizer & Render, 2010; Jacoby, 2009). This is very beneficial to many companies, and will help the new power tool company because there will not be any excess inventory. That means lower costs, as well.

Reducing lot size and using blanket orders are other good ways to reduce costs. The power tool company can be helped by both of these, through keeping inventory moving so they do not have to store it and through getting items shipped at a previously agreed upon price -- but not until they are actually needed. That helps a company figure costs, but does not require it to store excess inventory (Heizer & Render, 2010).

E. Three Risks

1. Process- One of the risks associated with process would be the availability of raw materials that are used to produce the power tools. It is possible to mitigate this risk by locating different sources that can supply the raw materials the company needs. By staying in communication with a number of suppliers, the company can make quick choices in the event of a problem with the main supplier.

2. Control- A control risk could involve inferior products. If these fail to meet standards of quality but still get shipped out to customers, it could be disastrous for the company. Mitigating this risk can be done by a good quality control program that tests every product for proper assembly and functionality.

3. Environmental- An environmental risk that could be considered would be a downturn taken by the economy, as that could cause sales to decrease. There are ways to mitigate this risk, though, like offering a lower priced line of tools that would be more affordable when the economy is weaker. The workforce could also be cut back when the demands for products are not strong enough, and business loans are available to get through very lean times until adjustments can be made.

F. Organizational Structure and Components

1. Functional organizational structure-

The new power tool company will have a functional organizational structure where the manufacturing function is at the top. Operations, Finance/Accounting, and Marketing functions will be found underneath, as seen in the figure here:

The operations function would deal with facilities, production, inventory control, quality control, management of the supply chain, design, engineering, and analysis of processes (Heizer & Render, 2010). Under the finance or accounting function would be seen disbursements and credits, management of funds and requirements for capital (Heizer & Render, 2010). Marketing would watch over sales and promotion, advertising, and research as to the viability of the market (Heizer & Render, 2010). That allows the company to operate smoothly and keep functions separate from one another.

2. Organizational Components of the Operations Function-

The operations function includes the facilities department. This would focus on new construction and any maintenance required, as well as inventory control and production (Heizer & Render, 2010). Quality control is also found under the operations function, and ensures the materials that are received from suppliers are good quality and the products being shipped out meet company standards (Heizer & Render, 2010). Supply chain management also falls under the operations function, as does design -- where new products are created to fit customer needs. Engineering is equally valuable, since it maximizes efficiency for the company and provides adequate and properly designed workspace (Heizer & Render, 2010). The equipment has to run properly and efficiently, which can be done through the process analysis department (Heizer & Render, 2010).