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STRATEGIC ANDTACTICALISSUES INSCM 367determines the supply chain’s tactical structure. The sig-
nificant capital investments required in building such a
structure indicate the relative long run or strategic im-
portance of network decisions.Facility Function
How will each network investment facilitate the supply
chain strategy? Consider a manufacturing plant. If the
plant is set up to produce only a specific product type,
the chain will be more efficient, but less flexible than it
would be if the plant produced multiple product types.
A supply chain providing innovative products will likely
perform better with flexible manufacturing facilities.Facility Location
What locations should be chosen for facilities? A good
decision in this dimension is essential because the cost
ramifications of a suboptimal location could be substan-
tial. Shutting down or moving a facility is significant not
only in terms of financial resources but also in terms of
the impact on employees and communities. Other factors
that should be considered are the available infrastructure
for physical and information transportation, flexibility of
production technologies employed, external or macroeco-
nomic influences, political stability, location of competi-
tors, availability of required labor and materials, and the
logistics costs contingent on site selection.Capacity
Depending on the expected level of output for a facility,
capacity allocations should be made so that idle time is
minimal. Underutilization results in lower return on in-
vestment and is sure to get the attention of company ex-
ecutives. On the other hand, underallocating capacity (or
large utilizations) will create a bottleneck or constricted
link in the supply chain. This will result in unsatisfied
demand and lost sales or increased costs as a result of sat-
isfying demand from a nonoptimal location. The capac-
ity allocation decision is a relatively long-term commit-
ment, which becomes more significant as sophistication
and price of the production technology increases.Supply and Distribution
Who will serve our needs, and whose needs will we serve?
This is a recurring question. Decisions regarding the sup-
pliers to a facility and the demand to be satisfied by a facil-
ity determine the costs of material inputs, inventory, and
delivery. Therefore, as forces driving supply or demand
(or both) change, this decision must be reconsidered. The
objective here is typically to match suppliers and markets
to facilities to minimize not only the systemwide costs but
also the customer responsiveness of the supply chain. In
general, these criteria are often orthogonal, implying that
the sourcing and distribution decisions require a multi-
objective focus with some prioritization of the cost and
responsiveness aspects.
Each of these network design decisions are not made
in isolation since there is a need to prioritize and coordi-
nate their combined impact on the tactical operations of
the supply chain. They jointly determine the structure of
the supply chain, and it is within this structure that tac-
tical strategies are implemented to reinforce the overallstrategy of the entire chain. Once network design has been
finalized, the next key decision within the supply chain fo-
cuses on sourcing strategies.Sourcing Strategies
A primary driver of a firm’s SCM success is an effective
sourcing strategy. The firm’s ability to deliver its goods
and services to customers in a timely manner hinges
on obtaining the appropriate resources from the firm’s
suppliers. Because manufacturing firms typically spend
more than 50% of earned revenue on purchased mate-
rials, the costs of disruptions to production due to sup-
ply inadequacies are especially significant. Furthermore,
a firm’s financial and strategic success is fused to its supply
base.
The nature of a firm’s connection to its suppliers is evi-
dent in its sourcing strategy and is characterized by three
key interrelated decisions: (a) how many suppliers to or-
der from, (b) what criteria to use for choosing an appro-
priate set of suppliers, and (c) the quantity of goods to
order from each supplier.
Single sourcing strategies seek to build partnerships
between buyers and suppliers to foster cooperation and
achieve benefits for both players. With the adoption of
just-in-time inventory policies, supplier alliances with
varying degrees of coordination have shifted supply re-
lations toward single sourcing to streamline the supply
network. At the strategic level, single sourcing contradicts
portfolio theory. By not diversifying, a firm is assuming
greater risk. Therefore, tactical single sourcing benefits
need to justify the riskiness inherent in this relationship.
One method of alleviating the risks of single sourcing is to
ensure that suppliers develop contingency plans for ma-
terials in case of unforeseen circumstances. In fact, sup-
pliers dealing with IBM are required to provide details
of such contingency plans before the company will enter
into purchasing contracts with them.
The obvious benefits of single sourcing for the firm are
quantity discounts from order consolidation, reduced or-
der lead times, and logistical cost reductions as a result
of a scaled down supplier base. The ordering costs advan-
tage of single sourcing is diminishing, however, because
of the proliferation of Internet procurement tools, which
tend to reduce ordering costs and streamline purchasing
processes.
In contrast, a larger supply base possesses greater up-
side volume flexibility through the summation of sup-
plier capacities. Strategically, a manufacturer’s leverage
is kept intact when the firm diversifies its total require-
ments among multiple sources. Additionally, alternative
sources hedge the risk of creating a monopolistic (sole
source) supplier, and the risk of a supplier integrating for-
ward to compete with the buying firm directly. Online ex-
changes and marketplaces also provide multiple sourcing
benefits by automating the cumbersome tasks associated
with multiple supplier dealings.
In concert with decisions regarding the number of sup-
pliers for a product, a firm must develop an appropriate
set of criteria to determine a given supplier’s abilities to
satisfy the firm’s requirements. In practice, this is evalu-
ated using scoring models which incorporate quantifiable