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Operations Strategy – Student Study Guide
CHAPTERS 6 and 7
SUPPLY NETWORK RELATIONSHIPS, SUPPLY NETWORK
BEHAVIOR
Introduction
Chapters 6 and 7 both examine what has become one of the most fashionable topics in
management over recent years – supply chain or supply network management. And
while many fashions in management decay rapidly, supply network concepts are
likely to be influential in the long term. This is because the network concept has been
particularly influential in developing our understanding of the scope and content of
strategic action. Yet, as an idea, it is not all that novel. Many authors and academics
over the last 30 or 40 years have emphasized that an organization’s success depends
on its relationships with other “actors” in its industry, whether those be suppliers,
customers, partners or collaborators. The two chapters dealing with the these topics
are (in a similar way to the capacity issue) divided into one that initially looks at
supply networks from a static perspective, concentrating on the nature of the
relationships between actors in the network. The other examines the more dynamic
behavior of supply networks as they change both in the short term and long term.
Key points
Operations strategy changes over time
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It is useful to start off by recognizing that supply network management is, of
itself, still a controversial issue. Some people object to the term “management” in
this context. They argue that the organization ends where its discretion ends and
another begins. In other words, how can we manage the other actors in the
network, they are beyond our control. Yet, even if this view is technically correct,
it is certainly over pedantic. How can you manage anything or anybody for that
matter? By “supply network management” we are first of all attempting to
understand how one company’s actions are influenced by its interactions with
other players in the network and second, thinking about how we can influence
other players in the network towards a set of specific ends.

Although neither chapter dwells on this issue, there is another point and a
particularly important one, that needs to be understood. That is, supply network
management has substantially reinforced the idea that operations management and
strategy is an important subject. Think about it like this. At one time, in order to
sell something to a customer, you simply extolled the virtues of the product or
service you were trying to sell. Yet the vast majority of sales transactions (in terms
of value at least) are from one company to another. Therefore, rather than say,
“Buy my product or service, it’s better than anyone else’s”, it is perhaps more
appropriate to say, “You are a business with an operation to run, I am also a
business who runs an operation, how can my operation help your operation to run
better?” Essentially this is an “operation-to-operation” transaction and in order to
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Operations Strategy – Student Study Guide
make that transaction work the supplier operation must understand something
about the customer operation. That is, in order to make a sale to another business
you must be able to understand the operations management and operations
strategy issues that it faces. Or put it another way, you can’t sell effectively unless
you have the skills that enable you to analyze and understand your customers’
operations.
Types of relationship

Chapter 6 uses the market requirements – operations resource distinction to define
different types of relationships. In
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Vertical integration
Traditional market relationships
Partnership supply relationships
Virtual relationships

Vertical integration has become relatively unfashionable in recent years as
organizations have been trying to stick to what they know best and ditch other
activities. Yet, although pure vertical integration is rarely found in modern
business, most organizations, at the margin, are still faced the decision as to
whether to do certain activities themselves or alternatively outsource them.
Therefore, just because vertical integration in its extreme form is unfashionable,
the principles and decisions behind vertical integration are an every day concern of
most businesses.

Traditional market supply is the polar opposite of vertical integration. It means
relying on the market to provide goods and services as and when they are needed.
A company which practiced traditional market supply would therefore have a
large purchasing department that would continually be searching the market for
the best value. Relationships will be probably short and certainly purely
commercial.

Partnership supply relationships are a method of trying to get the closeness of
vertical integration without its complacency. Although partnership relationships
have become very fashionable, Chapter 6 stresses the problems as well as the
advantages of such relationships. It also makes the point that the level of trust
required to maintain such relationships is often beyond the abilities (or indeed
interests) of many organizations.

Virtual relationships are not so much a type of supply network relationship, but
rather a description of the extent to which a company relies on them. A pure
virtual company has no resources of its own but buys in everything it needs. In its
pure form one can imagine one person with a good internet connection and a
telephone running an entire network.
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Operations Strategy – Student Study Guide
Supply Network Behavior

One of the key points to understand about supply network behavior is that supply
networks change over time. They always have, and they always will. In any
particular industry sometimes the structure of supply networks changes quickly, at
other times relationships between companies may remain stable for years. What is
important is that any company understands when it is coming up to, or in the
middle of, a period of change, and is able to work on the operations implications
of that change.
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The best example of this (mentioned in Chapter 7) is the recorded music industry.
At the time of writing it is still not clear in what way (if at all) the ability to
download music over the Internet will change the nature and role of all the
companies that make up the supply networks in that industry.
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The second issue of supply network behavior which it is important to understand
is that of network dynamics. By this we mean the way that specific supply chain or
supply networks behave in the short to medium term. There are two ways of
thinking about this issue.
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From a quantitative point of view – understanding the bull-whip effect.
From a qualitative point of view – soft system dynamics.
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There is a famous game, called “The Beer Game” which demonstrates this. It
involves a “chain” of players, who initially are not allowed to talk to each other,
placing orders on paper and moving products (barrels of beer, represented by coins
or counters) down the line. It demonstrates how relatively small changes in market
demand are amplified significantly further back up the chain. From an arithmetic
point of view, this is demonstrated in the form of a simple four-stage chain in
Chapter 7. It is worthwhile making sure that you understand the math used in this
example. Talk to any operations manager who runs a business upstream in a
supply chain and he or she will tell just how important this effect is.
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Often, an equally important issue is the qualitative nature of supply chain
behavior. This is illustrated in Chapter 7 by the gaps and mismatches that occur
between operations in a supply chain. Don’t dismiss this idea just because it is not
demonstrated mathematically. In practice it can be equally, if not more, important
as quantitative supply dynamics.
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Operations Strategy – Student Study Guide
Hints on answering the Astec Component Supplies case exercise
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This case is really about risk. What risks does Astec face if it turns down the deal
from Desron or if it accepts the deal?
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The obvious way forward is to try and identify the advantages and disadvantages
of accepting or rejecting the Desron deal. Next, try and think of how you could
reduce the downside effects of accepting or rejecting the deal should you choose
to do so.
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Think about how the issue of “trust” applies in this case.
Hints on answering the Zentrill case exercise
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This case is about how we can only understand the pressures on one operation by
putting it in the context of its suppliers’ and customers’ operations.
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The case provides us with an opportunity to look for, not only the relationships
between the three operations described, but also how upstream and downstream
relationships affect each other.
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Use the soft supply network behavior model and its gaps to analyze the
relationships between the players in this chain.
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In such circumstances it’s usually best to start at the demand end and work
backwards through the chain.
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