Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

2.7.2 Scenario: Evaluate Company Relationships in the Supply Chain

Intended learning outcomes: Describe a supply chain in the wood industry as well as possible extensions. Explain and perform a classification of company relationships in this supply chain.

You are commissioned to conduct an analysis of a supply chain in the wood and furniture industry. The IGEA Company is a furniture company known mainly for its successful cash-and-carry furniture retail business. Faced with enormous cost pressures, IGEA management has decided to explore the possibility of forming a supply chain. Internal company improvement measures simply do not promise more than marginal cost savings, and prices paid to suppliers cannot be lowered any further without risking losing some suppliers, which would mean that IGEA could no longer offer some of its products.

IGEA managers have read a study that you published on cost savings achieved through transcorporate supply chain management. They believe that the savings they could achieve would give them an edge over their main competitor, the INFERNIO Company. IGEA will therefore head the supply chain project, taking on the role of integrator. Because of its dominant position on the market, IGEA succeeds in convincing its main suppliers and some of the affiliated subsuppliers to join them in taking this transcorporate step.

Figure shows the interrelationships among the companies concerned. The companies highlighted in gray will be integrated into the new supply chain described below. As of now, five companies have agreed to form the supply chain:

  • Forest Clear Co.
  • Wood Chips Co.
  • Wood Flooring Co.
  • Wood Shelving
  • IGEA Co.

Fig.        A supply chain in the wood industry (compare Fig.

For the following analyses and considerations, however, it is important not to lose sight of the other, existing company relationships, since it might make sense to include additional companies as partners in the cooperative project or to sever some of the existing company relationships (for example, Kindling Co., Shavings Co., and other possible companies). You will need the following details of some of the company relationships to conduct your analysis and identify potential improvements:

  • Business relationship between Forest Clear Co. and Wood Chips Co.: Forest Clear, based in Finland, is known for its bold dealings with its customer, the Wood Chips Co. Delivery agreements are very short term, which necessitates frequent, tough negotiations. Still, the excellent quality of the Forest Clear material forces Wood Chips to continue doing business with them. However, delivery delays are becoming more and more frequent, to the point that this is now affecting Wood Chips’s own fill rate. The chief buyer at Wood Chips has invested many hours in meetings with the wood supplier in an attempt to improve the situation, but Forest Clear is resistant to showing its cards. The Forest Manager does not encourage visits, and the company will not reveal their long-term product and capacity planning. Although Forest Clear had been asked repeatedly to develop a concept for eliminating the problems, they have produced no proposals.
  • Business relationship between Wood Chips Co. and Wood Flooring Co.: The relationship between Wood Chips and Wood Flooring is very tense. The delivery reliability of Wood Chips, as subsupplier of high-quality boards, is seriously deficient, which is having an extremely negative effect on Wood Flooring’s own service level. For this reason, Wood Flooring is often forced to procure products from another subsupplier, Shavings Co., which entails considerable additional costs and effort. Another factor is the tense relationship between the chief buyer at Wood Flooring and management at Wood Chips. Because of the very large volume of material purchased, Wood Flooring has not been able to find another, equivalent supplier. In addition, because it procures such vast amounts of material, Wood Flooring has a strong enough position in the market that it can often dictate prices. And naturally, over the years, it has frequently exploited this advantage. Blanket contracts with a 5-year duration thus contain a 2.5% discount annually, based on forecasted productivity increases and a learning curve on the part of the supplier. This is another reason why Wood Chips does not want to work with Wood Flooring.
  • Business relationship between Wood Chips Co. and Wood Shelving Co.: Wood Shelving and Wood Chips enjoy a very friendly and constructive business partnership. Wood Shelving is one of Wood Chips’ most important customers, and Wood Chips is willing to respond promptly and without complications to any special requests. The business relationship has advanced to the point where monthly product management meetings at Wood Chips are attended by a purchaser from Wood Shelving, who reports on forecasts and trends in the sales market. For delivery, 1- to 2-year contracts are concluded. There are problems, however, with operational order processing. Orders are made by fax and by mail, but also by telephone, which results in a lot of redundant data, and no one is sure what the correct figures are. The business relationship is supported by the geographical proximity of the two companies (within 20 miles of each other).
  • Business relationship between Wood Shelving Co. and IGEA Co.: IGEA is known for its readiness to invest very heavily in new technologies. For instance, IGEA has already set up an EDI system with its main suppliers. As soon as a certain number of products are rung up at the cash registers or withdrawn from stock, automatic orders are placed with suppliers. The order quantity is then subtracted from the agreed-upon blanket order purchasing quantity. In selecting its suppliers, IGEA also has strict criteria: suppliers have to satisfy IGEA’s environmental concept, but they also have to meet high quality standards. Wood Shelving Co. has been able to meet these initial demands, but it is experiencing big difficulties in fulfilling the quantity demanded and adapting to the strong fluctuations in the demand. The consequen­ces for Wood Shelving are serious earnings losses, which have led to overtime and special shifts as well as enormous quantities of inventory. The two companies have engaged in heated discussions and mutual recriminations. Because of the un­predictable fluctuations, they have mandated a task force to examine the problem. Des­pi­te the frequent bottlenecks, IGEA wants to continue doing busi­ness with Wood Shelving. The product quality is high, and the compa­ny shows positive cooperation when it comes to new projects.
  • Business relationship between Wood Flooring Co. and IGEA Co.: Wood Flooring and IGEA also have a mutual information exchange program. Because demand does not fluctuate and sales processing of these higher-quality products are stable, the exchange of forecast information and planning is optimal. Advertising campaigns are planned cooperatively, and the two companies split the necessary costs as well as the additional earnings. However, as the product assortment of IGEA has a low demand for such high-quality products, the companies cooperate mainly for short-term products or particular partnerships of convenience. For this reason, Wood Flooring is also very active in the international market, and, due to its flexibility, it is highly esteemed as a business partner.
  • Other company relationships, which are not being considered in the start phase of the new supply chain project (shown in white): Kindling Co. and Shavings Co. have only recently entered into IGEA’s supply chain conglomerate. They partially supply to Wood Chips and Wood Flooring, but there are efforts underway to have them supply directly to Wood Shelving Co. IGEA has initiated this and wants to further expand its role as an integrator in the entire network.

Your task: Position the five business relationships listed above and enter your results into the portfolio shown in Figure

Fig.        Classification of company relationships in the supply chain.

Evaluate the individual companies’ potential development opportunities and development strategies within this supply chain. Indicate the trend (using an arrow) that best describes the future directions of each company. Write a one-page explanation of the positions and the corresponding trends of the customer-supplier business relationships. Include possible future business relationships with Wood Chips and Wood Flooring.

Course section 2.7: Subsections and their intended learning outcomes