Page 273 - Electronic Commerce

Chapter 5

companies in the supply chains for the products that they manufacture or sell. These
relationships can be quite complex, with suppliers helping their customers develop new
products, specify product features, refine product specifications, and identify needed
product improvements. In many cases, companies are able to reduce costs by developing
close relationships with a few suppliers rather than negotiating with a large number of
suppliers each time they need to buy materials or supplies. When companies integrate
their supply management and logistics activities across multiple participants in a
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particular product’s supply chain, the job of managing that integration is called supply
chain management. The ultimate goal of supply chain management is to achieve a higher-
quality or lower-cost product at the end of the chain.

Value Creation in the Supply Chain
In recent years, businesses have realized that they can save money and increase product
quality by taking a more active role in negotiations with suppliers. By engaging suppliers
in cooperative, long-term relationships, companies have found that they can work
together with these suppliers to identify new ways to provide their own customers with
faster, cheaper, and better service. By coordinating the efforts of supply chain
participants, firms that engage in supply chain management are reaching beyond the
limits of their own organization’s hierarchical structure and creating a new network form
of organization among the members of the supply chain.
Supply chain management was originally developed as a way to reduce costs. It
focused on very specific elements in the supply chain and tried to identify opportunities
for process efficiency. Today, supply chain management is used to add value in the form
of benefits to the ultimate consumer at the end of the supply chain.
Businesses that engage in supply chain management work to establish long-term
relationships with a small number of very capable suppliers. These suppliers, called tier-
one suppliers, in turn develop long-term relationships with a larger number of suppliers
that provide components and raw materials to them. These tier-two suppliers manage
relationships with the next level of suppliers, called tier-three suppliers, that provide them
with components and raw materials. A key element of these relationships is trust between
the parties. The long-term relationships created among participants in the supply chain
are called supply alliances. The level of information sharing that must take place among
the supply chain participants can be a major barrier to entering into these alliances.
Firms are not accustomed to disclosing detailed operating information and often perceive
that information disclosure might hurt the firm by placing it at a competitive
disadvantage.
For example, Dell Computer has been able to reduce supply chain costs by sharing
information with its suppliers. The moment Dell receives an order from a customer, it
makes that information available to its tier-one suppliers, who can then better plan their
production based on Dell’s exact demand trends. For example, a supplier of disk drives
can change its production plans immediately when it sees a shift in Dell’s customer orders
from computers with one size disk drive to another, usually larger, size disk drive. This
prevents the supplier from overproducing the smaller drive, which reduces the supplier’s
costs (for unsold drives) and costs in the supply chain overall (the supplier does not need

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