Supply Chain Operations Management - Essay Example

? Supply Chain Operations Management Question 1a When the average production cost of a product goes down as the production volume increases, such factors are known as economies of scale. For example, if it costs $1000 to produce 200 units of a product and $2000 to produce 500 units of the same product, the average cost per units of product falls from $5 per unit to $4 per unit, when the volume is increased. Such economies arise on account of no rise in fixed costs and production increases by a rise in the variable cost alone (The Economist, 2008). Vertical integration can be referred to as the level of ownership a firm associates with the downstream buyers and upstream suppliers. Ownership upstream towards suppliers and subsidiaries of inputs to production is known as backward vertical integration, while ownership downstream towards buyers and distribution centres is known as forward vertical integration. Figure 1: Vertical Integration (Source: PPT) The disadvantages associated with vertical integration in achieving economies of scale can be highlighted as: 1. The costs incurred in forward and backward vertical integration are huge and can be used to expand production activities which would contribute more towards profits than that contributed through integration. 2. The core management time gets more involved in managing diverse structure of the organization as a result of integration. Such time could otherwise be devoted to core activities of management and contribute to organizational profits. 3. It is argued that production capacities, as a result of vertical integration, may become so large that customer demand might fall short and hence, economies of scale might not be fully utilised. Also, a lot of production time might get wasted in meeting a definite customer demand, thereby reducing scope for optimum utilisation as well. This becomes a major disadvantage because as a result of vertical integration, fixed costs sharply become so high that in times of slumps in demand, a fall in production might lead to a greater rise in per unit fixed costs rather than variable costs. Such a scenario makes realisation of breakeven point near difficult. Question 1b It is suggested that vertical integration decreases costs, but when it is viewed from the organizational point of view, vertical integration leads to higher cost in terms of managing different new organizational departments and also, backwards integration tends to reduce efficiencies of suppliers by eliminating competition, thereby increasing costs. When a firm decides over vertical integration, it invests significantly in terms of investments in the organizational process. These investments arise out of forward and backward integration and are done on acquiring firms. Such costs are capital expenses. Huge expenses made during integration reduce a firm’s capability to stretch production capacity at least for some period of time. In an unpredictable market environment, such inflexibility can be quite serious and might lead to loss of market share altogether. During the process of integration, a firm invests in high cost machines which are necessary to carry out production activities of the acquired firm. In the slump demand scenario, the machine might not be utilised to the fullest or utilised at all. However, the acquiring firm has made expenses for the machine and the costs of which shall get added to per unit produce. Variable costs, on the other hand, are incurred per unit of good produced and can be reduced during slack in demand. Additionally, such costs cannot be shared with the consumer owing to competition. Hence, we see how vertical integration contributes to higher fixed costs and lower variable costs. In such a scenario, a firm can explore alternatives to vertical integration for eliminating the disadvantages associated with the integration process. Only after due consideration of the competitive environment, efficient scale of production of the prospective firm to be acquired and its alignment with the company’s scale of production, demand scenario, demand management plans and capacity planning, can a firm decide over vertical integration (Ohio University, n.d.). Question 1c It has been observed that when a supplier engages in vertical integration, both forward and backward, it tries to isolate its production processes from the wider market access to a more limited one restricted within the organization. All stages of production and distribution process get narrowed to the functioning of a single firm. This boils down to the fact that the wider market, accessible when such levels of production were separated, is no longer available or has lessened down. Competition was prevalent in each stage of production; however, these stages now serve the needs of the company rather than working towards competition. Such restriction brings in a lack of drive to innovate, in order to overcome competition, because all processes now feel safe in serving company needs. This kills scope of innovation at various production and distribution levels. Another deterrent to innovation is the fact that the supplier, who engages in integration, gets more involved in managing various business activities and coordinating between them and the scope for concentration on innovation reduces to a large extent. If a firm engages in outsourcing some of its subsidiary production activities, it ensures that the work gets done at a lesser cost. Outsourcing reduces costs of production in terms of lesser investments required in fixed assets. This money can be spent in research and development activities which shall trigger innovation. Also, from the standpoint of manager’s time, managers at supplier firm shall have fewer tasks and activities to manage, giving them more time to concentrate and devise ways to innovate in products, processes and structures. Outsourcing also allows application of specialised skills for outsourcing activity and by employing specialists at work; innovation can come through outsourced activities. Therefore, from the innovation point of view, outsourcing scores better than vertical integration of activities (StrategyTrain, n.d.). Question 1d Vertical integration of various suppliers lessens the number of individuals who add their benefits down the supply chain. When such production activities come together under one roof, the costs of such benefits drawn by intermediaries in the supplier end get eliminated. This significantly brings down production costs. For example, if the raw material owner is removed from the supply chain by absorption of raw material supplier within the organization, then the profits of the raw material seller get eliminated from production costs. In such case, these savings in cost can be taken together to work towards improving the quality of products. Another factor that contributes to better product quality is that the management of production process comes under one supplier, who knows the needs of the consumer. Firms who engage in vertical integration would try to eliminate competition by producing products of a better quality. Since production channel is under one management, product quality gets enhanced wherever it suits best. Suppliers also have the advantage of acquiring firms with highly specialised assets, which in turn shall contribute towards improving product quality on the whole (Lin, Parlakturk and Swaminathan, 2012). Paradoxically, vertical integration can also cause deterioration in quality of goods and services. Whenever a firm engages in integration, be it forward or backward, it incurs huge costs in acquiring firms. This reduces flexibility in operations due to reduced cash for some periods. This cash blockage causes lack of availability of funds to invest in improving quality of products. Vertical integration also calls for management of different divisions of production and supply activities and diversion of focus and energies to supply side areas, rather than joining forces to focus on product improvisations and enhancement of product quality. Managers have to devote more time in managing bureaucracies of the organization, rather than spend time in developing means of improving product quality. As a result of vertical integration, supply chain ends that come together during vertical integration are specialised in their own areas of manufacturing. Overall improvement in product quality requires coordinated efforts of various production activities because isolated improvement efforts might not get assimilated within the entire production system and efforts of such might go in vain. Hence, integration of acquired units within the organization takes time and the organization has to allow such time lag before taking any step towards improvement in product quality. Question 2a Exponential smoothing is a statistical method adopted to smooth an erratic or noisy demand pattern in order to establish the underlying demand trend. Exponential smoothing weighs the past observations of demand with exponentially declining weights and thus, forecasts future values based on past trends. The basic equation of exponential smoothing can be laid down as: y (k+11) = y(k) + ?(x(k+1) – y(k)) Where: y = forecast x = actual k = week and ? = smoothing constant subject to 0 Read More