Module 1

SUPPLY CHAIN ENVIRONMENTS
LEARNER GUIDE

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Module # 333905000-KM-01

NQF Level 5

Notional hours 100

Credit(s) 10

Development Transport Education and Training Authority

Quality Partner (TETA)

Occupation or 333905000;: Supply Chain Practitioner

Specialization

Associated Occupation 333905000; Supply Chain Practitioner

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Note to the learner
This Learner Guide provides a comprehensive overview of the module. It is designed to improve
the skills and knowledge of learners, and thus enabling them to effectively and efficiently
complete specific tasks.
Purpose
The main focus of the learning in this knowledge module is to ensure learners understand the
role and scope of supply chain in different economic sectors, theories of market forces that
impact on the supply chain, approaches to external environment and its impact on the supply
chain and ethics and the supply chain
Topic elements to be covered include

 KM-01-KT01: The role and scope of supply chain in different economic sectors (25%)
 KM-01-KT02: Theories market forces that impact on the supply chain (25%)
 KM-01-KT03: Approaches to external environment and its impact on the supply chain

(25%)
 KM-01-KT04: Ethics and the supply chain (25%)
Exemptions
None
Entry Requirements
Open
Provider Accreditation Requirements for the Knowledge Module
Physical Requirements
 Classroom furniture (chairs and tables, audio equipment and all other equipment

conducive to a learning environment)
 Hand-outs and stationery (electronic consumables, pencils/paper)
 Learning material
 Access to ethical codes and supply chain templates and working documents.
 Operating processes covering purchasing and supply processes, i.e. acquisition, demand

management, stock control, supplier selection and development, tender bid committee
Human Resource Requirements:

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 Supervisor/worker ratio of 1:25.
 A qualified subject matter expert on site that is involved in the supply chain process
Legal Requirements
 Accreditation with SAQA/QCTO/ETQA.
 Compliance with the SA legislative framework relating to the supply chain.
 Compliance with all occupational health and safety requirements
Venue, Date and Time:
Consult your facilitator should there be any changes to the venue, date and/or time.
Refer to your timetable
Assessments
The only way to establish whether you are competent and have accomplished the learning
outcomes is through continuous assessments. This assessment process involves interpreting
evidence about your ability to perform certain tasks. You will be required to perform certain
procedures and tasks during the training programmer and will be assessed on them to certify your
competence.

This module includes assessments in the form of self-evaluations/activities and exercises. The
exercises, activities and self-assessments will be done in pairs, groups or on your own. These
exercises/activities or self-assessments (Learner workbook) must be handed to the facilitator. It
will be added to your portfolio of evidence, which will be proof signed by your facilitator that you
have successfully performed these tasks.

Listen carefully to the instructions of the facilitator and do the given activities in the time given to
you.

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Activities

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Activities observation or a portfolio of evidence should be submitted in this regard.

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only be completed once a learner is in the workplace

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Notes This icon represents important notes you must remember as part of the learning process.

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KM-01-KT01: The role and scope of supply chain in different economic sectors

KT0101 The role and scope of supply chain in the private sector
KT0102 The role and scope of supply chain in the public sector
KT0103 The role and scope of supply chain in the not for profit or third sector

The role and scope of supply chain in the private sector
A supply chain focuses upon a product and extends back over the different actors, activities and
resources required for making it available at the place of consumption. It encompasses a set of
logistics and transport chains linking activities from basic extraction of raw materials to retailing
(final consumption).

A logistics focuses upon an item part of an inventory and extends from when the item number is
created (manufactured or received from a supplier) until it is dissolved.

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Supply chain is divided in four main pillars:
 Plan - plans for supply/demand of product based on historical data to model and
create statistical forecasts
 Source - or procurement ensures we get the raw materials for such products in the
most efficient and economical way
 Make - manufactures the product in a plant
 Deliver - customer facing and normally covers everything from order to cash including
customer relationship management

These pillars have many sub areas and therefore the scope of supply chain is extremely broad.
Deliver for instance has contact centers, electronic systems, warehouses, quality, transportation,
etc. Many multinationals dedicate 40–50% of all their labor to supply chain.
Strategic decisions within supply chain

Three types of strategic decisions regarding supply chain could be listed:

A. Forming supply chain structure;
B. Shaping relations with supply chain members;
C. Designing rules of synchronization between demand and supply streams.
It should be highlighted that although described separately, described decisions are linked
closely, being undertaken simultaneously

A. Supply chain structure formulation

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Supply chain structure stands for constellation of companies forming supply chain, as well as
roles these companies play, i.e. manage/perform activities/processes included in supply chain.
Such understanding of supply chain structure is closely related to business model definition
presented by Obłój (formulation of value chain allowing for efficient utilization and renovation
of resources and competences) as well as concept of business architecture defined by Trocki (the
way of shaping group of companies, which collaborate at achieving business goals, along with
mutual links among those companies8).
Strategic decisions regarding formulation of supply chain structure include:
1. Construction of value system and roles each supply chain member plays in the system – logic
of responsibilities/activities deployment;
2. Number, location and capacity of nodes forming production-logistics net − spatial deployment
of activities.
As far as value system construction is concerned, the starting point is definition of key
competences in the context of value provision to the chosen market segments. The competences
that provide competitive advantage to the company should be controlled internally, while the
others, especially those performed by the other companies in the most efficient manner, should
be outsourced9.
On the basis of the above description, Obłój proposed three models of value system construction:

 Operator: the company concentrates on chosen aspect of value creations (certain
element of value system). In the past that operator model was characteristic for small
and medium companies or business units of large enterprises, which specialize in
managing a single activity/process within value system, fulfilling the roles defined by
supply chain leader. Today the market trends such as outsourcing, lean management,
virtualization and IT development causes changes of role and behaviors of SMEs in
supply chains. Analysis of statistical data and observations concerning quality changes
proves that these changes consist in:
 development of new competences and skills connected with requirement of
informational transparency for increase of value added;

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 increase of activity and flexibility of SMEs in creation of supply networks
utilizing resources of large companies;

 Integrator: the company takes control over whole or substantial part of value system. At
the first glance, integrator is not a proper model for supply chain management.
Nonetheless, as Obłój explains, control over value system does not only materialize
through mergers/acquisitions of suppliers/clients but also by building long term relations
with other supply chain members, where integrator dominates, imposing the rules of
value creation (utilizing his bargaining power). The model is characteristic for large
companies, usually international corporations.

 Conductor: the company focuses on chosen areas of value system (which are the core
competences) spinning off/ forming strategic alliances for other areas. The very important
competence of conductor is the ability of orchestrating activities and competences of
supply chain members. A virtual company, which is able to reconfigure supply chain
structure in a very fast manner is a vivid example of the conductor model. As Obój explains
the size and value of tangible resources owned by conductor is not of primary importance.
What really matters is the ability to create and implement supply chain vision and mutual
competitive advantage.

B. Shaping relations with supply chain members

The second group of strategic decisions contain formulation of relations with other supply chain
members. Building the right set of relations, the company considers the following list of criteria:

 Mechanism of relation: transaction, trust, capital;
 Symmetry of partners;
 Timespan of cooperation;
 Scope of collaboration.

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According to Cohen and Roussel, relations within supply chain are formed usually with:
 Customers;
 Physical goods suppliers;
 Services providers (mainly third-party logisticians);
 Competitors.

As far as supply chain relations are concerned, partnership is quoted as a most desirable form.
However, this issue necessitates more detailed analysis.

Market Partnership Joint Merger/
relations venture acquisitio
n
Market Capital

Fig. 1. Continuum of control and collaboration
Market relations are probably the most common form of collaboration between suppliers and
buyers. In that case no mutual initiatives improving flows of goods and information are
undertaken. Obviously, market relations could be long term. However, trust is replaced here by
formal agreements, which describe desirable behavior of both sides of relation.

SCOPE OF COLLABORATION

small large

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R1 R2 K1 JV W
P1 K2 F

P2 P3

Transactions trust capital
Forms of regulation

Shaping supply chain relations is a sophisticated task. First, large amount of possible solutions is
available. Secondly, choosing from the pool of available options, it is necessary to consider
interweaving economic, social and technical issues. What is more:
1. Each supply chain is a set of various relations that overlap;
2. Supply chain relations are not static and can be changed;
3. Change of relations type in one area of supply chain affects the others, hence holistic view is
indispensable.
C. Balancing supply and demand stream

First of all, considering supply and demand balance, it is necessary, as the term is not unequivocal.
According to the Webster’s Encyclopedia synchronizing means “to occur at the same time or to
proceed in the same rate”. For the sake of the article, the understanding of issue in question is
understand broader, i.e. as reconciliation between two streams in time and space.
Second, the subject of synchronization should be precisely defined. In this case, subject
perception of supply chain is helpful, according to which, the synchronization includes spectrum
starting from material flows, ending at balancing flows of materials, information, people,
knowledge, technology and money. It is regarded here, that primary importance should be
prescribed to adjusting demand (flowing through the chain as information – mainly orders and
sales/production plans) and supply of goods and services (flows of material and business

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information). Both flows should be accompanied by the third – money which allows for better
deployment of risk and costs and benefits among supply chain members.

The role and scope of supply chain in the public sector
Supply managers who work in the public sector must comply with unique transparency rules.
Despite those and other constraints, they can achieve substantial savings by integrating the
public-sector requirements with private sector supply chain management concepts

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Imagine that you oversee purchasing and that the prices you pay for goods and services are public
information. What's more, your bid openings are public events that suppliers and other
interested parties are invited to attend. To most supply chain management (SCM) professionals
that would be an unusual (and probably uncomfortable) situation, but for managers in the public
sector it's a typical scenario.
As that example suggests, supply chain managers who work in the public sector face an extra
challenge that most of their private sector peers do not: the need to comply with transparency
and procurement rules that are typical of federal, state, and municipal agencies. Despite those
constraints, public sector managers can still achieve savings ranging from 5 percent to 25 percent
per commodity. To do that, they must integrate the public-sector requirements with such private
sector concepts as strategic sourcing, supplier relationship management, and inventory
management.
Applying private sector SCM principles to the public sector could potentially have a huge cost
impact. In a 2009 report, the consulting firm McKinsey & Company noted that public sector
purchases of goods and services account for 5 percent to 8 percent of gross domestic product
(GDP) for most Organization for Economic Cooperation and Development (OECD) countries.

Public and private: how do they differ?

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What makes supply chain management in the public sector different from private industry? There
are a number of factors that influence supply chain practices, particularly in regard to
procurement.
First and foremost is a requirement for transparency. Government transparency exists when all
information is openly and freely available. In public sector procurement, this means that the
procurement process, rules, and transactions must be spelled out and available to the public as
well as to potential suppliers. This requirement affects such areas as advertising of the contract
opportunity, the public tendering process, and the awarding of the contract. Moreover, all
suppliers must be treated the same regarding access to information, specifications, and the
amount of time they have to respond to a bid. Pricing is public information, and bid openings are
public events where suppliers are invited to witness the opening of the sealed bid submissions.

After the lowest bid has been revealed at the bid opening, the soliciting agency determines
whether the company that submitted that bid is the lowest "responsive and responsible" bidder.
"Responsive" means that the bidder properly completes the bid and also answers all subsequent
requests for information within stated time frames. This may include but is not limited to
providing samples or completing integrity questionnaires. "Responsible" refers specifically to
successfully passing the background and integrity checks that are required when the total
contract price is above a particular threshold.

In addition to evaluation tools used in the private sector, such as sample reviews, reference
checks, credit checks, site visits, and interviews with principals, many public agencies also
conduct background checks on the company, which usually are carried out by an investigative
agency such as an Inspector General's office. These investigations may also include the owners
and principal executives.

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Similarities abound

Despite the real and perceived differences, public and private supply chains are alike in three
important ways:
1. They share a common goal: to obtain the best value for the organization. This means getting
the most from each dollar at every step in the supply chain. In the public-sector spending
efficiency equals organizational efficiency; this applies not just to purchasing but to the entire
supply chain.
2. Customers (and yes, the public sector does have customers) continue to demand better
quality, faster service, and lower cost. If an organization cannot continuously and consistently
provide materials "better, faster, and cheaper," then its long-term survival is doubtful. This is as
true for public sector supply chains as it is for the private sector, especially in light of the current
public backlash against the cost of government. Accordingly, public sector officials are placing a
new emphasis on cycle-time compression and speeding up the supply chain, from procurement
to delivery. Balancing this demand against the requirements for transparency presents a unique
challenge for the public sector.
3. The new reality is that all supply chains are pressured to provide more (materials, services,
information, and so forth) in an environment of continually dwindling resources. Staff reductions,
unheard-of in government just a decade ago, are now commonplace and are forcing the public
sector to either find new ways to provide materials and services or to eliminate some services
entirely.
Another way that public and private sector supply chains are similar is that they are both subject
to three trends that are driving change:

• Both supply chain models require total process visibility if they are to increase the speed
of sourcing, drive down the cost of inventory, and improve the cash-to-cash cycle. Visibility
promotes fact-based decision making and removes the excuses for making poor decisions
by replacing anecdotes and conjecture with informational certainty. Driving costs out of
private sector supply chains has been a priority for a generation of supply chain

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professionals. The reality for public sector supply chain managers is that they, too, need
to eliminate costs from the supply chain to ensure their organizations' long-term viability.
• Both public and private sector supply chains must become more agile. In a world where
continuous improvements in communication and technology lead to shorter shelf lives for
many products, supply chains have the increasingly difficult job of maintaining a relevant
portfolio of materials and services while avoiding the losses caused by holding obsolete
material. Material liquidation is a multibillion-dollar industry that exists because of supply
chain inefficiency. Agility keeps obsolescence to a minimum.
• Both types of supply chains must have transparency. The need for transparency in the
private sector has become painfully apparent, as evidenced by the implementation of the
Sarbanes-Oxley Act and related legislation in the United States. Transparency, however, is
not just about rules, regulations, and filling out forms. It is also about ethics in business
relationships. Ethics and proper decorum in business relationships allow organizations to
simultaneously collaborate and be competitive. It is possible, moreover, for both public
and private supply chains to have a business relationship based on trust and sharing
information that rewards innovation and productivity improvement through shared
savings agreements.
In some ways, then, public sector supply chains are not very different from their private sector
counterparts. Public sector customers demand that materials and services be delivered with the
speed and cost structure of the private sector, and public-sector supply professionals are
struggling with how to accomplish that. It can be done—by using private sector principles such
as strategic sourcing, supplier management, and inventory control in a way that is acceptable in
public sector settings.

The role and scope of supply chain in the not for profit or third sector

According to the Council of Supply Chain Management Professionals (non-profit organization
which is better known under former name the Council of Logistics Management): “Supply Chain
Management encompasses the planning and management of all activities involved in sourcing

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and procurement, conversion, and all logistics management activities. Importantly, it also
includes coordination and collaboration with channel partners, which can be suppliers,
intermediaries, third party service providers, and customers. In essence, supply chain
management integrates supply and demand management within and across companies”. The
demand management is relatively new component within supply chain management concept
which helps the suppliers to understand the customer’s buying processes as well as to build
customer relationships. It is still less recognized element in logistically oriented supply chain
designs. Nevertheless, based on the product – relationship matrix, Cooper and Slagmulder
distinguished four key decisions and activities areas in the integrated supply chains management,
such as:

 configuration of product and network, which covers the decisions concerning the
main rules of cooperation,

 formation of the production network, mainly the choice of production facility and
warehousing locations as well as their capabilities,

 product design with involvement the research and development abilities of suppliers,
 process optimization in order to reduce cycle times and inventory level in the cost-

effective way.
Despite that there is no consensus of the contemporary supply chains and supply chain
management definitions, the essence of the concepts is focused on changing customer-suppliers’
relationships from traditional power and competition to trust and close collaboration in order to
receive synergy effects in terms of value added and competitive advantage. It is always focused
on efficient integration of its links and coordination of the main value-added business process
from the supplier to the final customers.

Strategic decisions and their hierarchy
Strategic decisions are long term and their results are difficult to change. Moreover, they deal
with high complexity, future, hence involve a lot of risk. Strategic decisions undertaken within a

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company could be divided into three groups, in accordance with management level and the level
of detail:
1. Corporate strategy which embraces the following decisions: growth direction (e.g. market
development, product development, diversification), growth pace (stabilization, expansion,
defense of position) as well as form of growth (internal, capital, contractual);
2. Competitive/business unit/sector strategy – includes decisions concerning company’s relations
with competitors, clients, suppliers within each sector the company plan to operate. In particular,
competitive strategy should provide answers to the following questions:

a) Where to compete/cooperate (whole market, chosen segment)?
b) What to compete with (value delivered to the final customer – price, quality,

innovativeness, time, others)?
c) Whether to compete (direct competition, avoiding competition, cooperate)?
d) What kind of relations are developed with suppliers and clients (transactions, partnership,

acquisition, merger)?
e)
From SCM point of view, vertical relations (supplier – client), are of the greatest significance.
Nonetheless, concerning the broad understanding of supply chain, according to which it includes
both vertical and horizontal constellations, relations with competitors (competition, strategic
alliances, mergers, acquisitions) should be also taken into account.

3. Functional strategies – include details of mentioned above strategies. But to put it differently,
they not only describe the mechanics of implementing corporate and competitive strategy across
various functions, but simultaneously they indicate the possibilities as well as barriers of its full
implementation. Furthermore, functional strategy can be understood as a means for supporting
the firm’s overall strategic good to achieve competitive advantage. Supply chain management is
based on process not function approach to company. Hence, identification of functional
strategies might rise some concerns. To address this issue Lambert distinguishes process, instead
of functional strategies for the sake of SCM.

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TOPIC QUIZ
I. Identify and define various organisations
II. Explain the size and scope of the private sector in different economies
III. Describe the functions of private sector organisations such as profit, growth, market

share, share price, other financial measures, corporate and social responsibility
IV. Analyse the role and scope of the supply chain in the private sector
V. Explain the size and scope of the public sector, central and local government
VI. Describe the functions of the public sector, central and local government
VII. Analyse the role and scope of the supply chain in the public sector
VIII. Explain the size and scope of the not for profit or third sector
IX. Describe the functions of the not for profit or third sector
X. Analyse the role and scope of the supply chain in the not for profit or third sector

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KM-01-KT02: Theories market forces that impact on the supply chain

KT0201 The implications of different types of competitive markets on the supply chain
KT0202 The principles of market demand and supply and how these impact on the supply
chain
KT0203 The impact of market factors on organisations

The implications of different types of competitive markets on the supply chain
Supply market analysis is a technique used to identify market characteristics for specific goods or
services. It provides information that is critical to developing effective procurement strategies, in
the context of planning for significant procurement.
Supply market analysis provides a strategic understanding of:

 how a market works
 the direction in which a market is heading
 the competitiveness of a market
 the capability and capacity of a market
 key suppliers and the value that suppliers place on the agency as a customer
 how suppliers or markets can be developed to better meet agency requirements
 the sustainability performance and capability of the market
 how to manage variances in pricing over time or between suppliers.

Supply market analysis also helps to manage risk by identifying and analyzing how favourable the

supply market is to buyers compared with suppliers, and the probability of supply market failure.

Together with techniques such as market sounding and developing suppliers and markets, such

analysis can assist agencies to develop strategies to influence the market, in order to:

 increase the supply base and competition (where possible)

 provide innovative responses to constraints or opportunities.

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The supply market analysis framework

Conducting supply market analysis
Market structure
Defining the market
Defining the market entails determining the key characteristics of the market, such as whether it
is purely a product or service or a combination, and determining whether the market is divided
into commercial, technical and/or geographic segments.
Market size and market shares
Once the market is defined a number of logical metric formulations are necessary to gain an
overall understanding of the market structure. Firstly, the size of the total market should be
determined, both in terms of sales (dollar value) and volume/turnover. Depending on the way
the market has been defined, the total size of the market may then be broken down at an
international, national or regional level—depending on the level of detail warranted. It is
recommended that the total market size is also analyzed in terms of the private sector versus the
public-sector contribution

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Market concentration
There are four generic levels of market concentration. These range from the extreme situation
of low concentration—where there are many firms each selling an identical product (perfect
competition)—to the extreme situation of high concentration, where only one supplier exists
that is able to meet the needs of the agency (monopoly). Markets in between these two extremes
are referred to as oligopolies or are characterized by monopolistic competition.

The degree of market concentration can be calculated as a ratio by dividing the total market
share of the largest four firms by the total size of the market. The closer the outcome is to 1.0,
the higher the concentration of the market and the likelihood that the market is an oligopoly,
duopoly or monopoly. If the outcome is less than 0.25 the concentration is low and the market
most likely competitive. In a developed economy, the majority of markets are characterized by
monopolistic competition or oligopolies.

Ownership

Ownership structures can influence the manner in which firms compete in the market
and the products/services they may offer in the future. Understanding the ownership
of firms can explain their behavior: for example, an agency may think that they are
dealing with competing suppliers in a market when in fact one is a subsidiary of the
other. It is important to find out if there are any ownership transfers looming on the
horizon for the key suppliers. Changes in ownership, such as through takeovers, can
be evidence of further consolidation and hence concentration in the market. Also
knowing whether a supplier is purely local or a part of a large national or international
firm may indicate whether major decisions are made in-country or overseas.

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Profitability

Profitability may indicate the viability of a supplier; whether a supplier will contribute
to a continuing competitive market; or whether a supplier will withdraw, leading to a
more concentrated market.

Table 5: Key research questions

Is the market divided into commercial, technical or geographic segments?
What is the relevant market segment to be analyzed?

How many suppliers are there in the market and what is the size of the total
market in terms of dollar sales or volume (whichever is more
appropriate)?

What is the relative market share of each supplier (e.g. in terms of
turnover, volume, employee numbers or production capabilities)?

Does the market contain distinguishable product segments (product
differentiation)?

Are there dominant suppliers, or is the market evenly distributed (market
concentration)?

Is the market self-reliant for its inputs, or is there a multi-level supply chain
(vertical integration)?

Does the market have significant links to other markets? For example,
does the market supply key goods or services to other markets?

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 Who are the significant market participants, in terms of buyers,
suppliers and the supply chain?

Competition
Recommended practice

A sound understanding of how suppliers compete in the market provides essential
information about supply market dynamics, including the availability and pricing of
products and services now and in the future. Following trends, and examining the
likelihood of competitors entering or leaving the market, can help agencies to make
more informed decisions and plan more effectively.
The basis of competition

Analyzing competition requires examining the way in which the suppliers in the
market compete. Examples of different features suppliers compete on are:

 price
 service
 distribution
 product types
 brand image.
Supply Chains
Some industries consist of suppliers that will compete heavily on price, offering the same generic
product and service levels. Other industries differentiate between competitors by quality, level of
support service, and distribution arrangements. Suppliers within these industries may be less
likely to negotiate on price, in the belief that the quality of their product may be compromised. If
firms in a market are competing based on buyers’ perceptions of brand image, it is worth

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investigating whether these perceptions of brand image are warranted. Table 6 shows the
characteristics of a market where competition is intensifying.

Table 6: When does competition intensify
According to Porter’s five forces (see the ‘Supply market analysis framework’ section, above
in this guide), rivalry/competition generally intensifies when:

 the number of competing firms increases
 the market is declining, not growing or growing at a slow rate
 there are high fixed costs that need to be covered
 storage costs are high or when perishables are involved
 switching costs are low
 exit and entry barriers are low
 being competitive is strategically important.

Changes to competition

Forecasting the future competitive environment can assist agencies to plan for
changes in the market and, in some instances, to wait for circumstances to change
in order to get a better outcome. For example, the electricity industry has
undergone a process of deregulation. Prior to this, one firm supplied all electricity.
Barriers to entry for the retail of electricity have been sequentially reduced,
resulting in more choices for buyers. This can place the agency in a better position
to seek the best deal.

If it is strategically important, large firms may use their size and diversity of
operations to subsidize loss-making ventures and attempt to reduce competition.

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This may occur in a new market in order to develop market share, or in an established
market to price competitors out of the market. Being aware of such activities may
help to ensure that the agency is not assisting a dominant supplier in gaining a
monopoly position in a market.

A supply chain consists of all parties involved in the process of creating a good
or service: progressing from inputs through production, distribution and
marketing to the end user. The purpose of analyzing the supply chain is to
attain a good understanding of:

 what value is added by the different parties of the supply chain
 possible unnecessary costs within the supply chain
 dependencies in the supply chain and the potential risks they pose
 how these dependencies and risks can be managed now and in the future.

This knowledge is essential to assist the agency develop a sound procurement
strategy for managing the supply chain value, risks and costs.

Identify the level of value-adding

Supply chains need to be examined to identify whether each element in the chain
is value-adding and to determine whether the level of added value is worth the
resultant cost increase.

The supply chain parties (resource suppliers, manufacturers, importers,
wholesalers, and distributors) have to decide:

 their location and what they produce
 how, and where, they source their key inputs to production
 how they manage inventories
 how they organize transportation.

All of these decisions are associated with risks, costs, the value they add, and the
price charged for these activities. It is important that agencies analyze supply chain

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participants, map what each member does, where each is situated and the goals of
each member.

Procurement officers should not underestimate the value added within the supply chain by
suppliers or their expertise. In some cases, it may seem that it would be cheaper for the agency
to undertake an activity themselves and bypass a member of the supply chain. However,
procurement officers need to carefully evaluate whether the opportunity cost of managing the
activity internally – with the associated risks – is less than paying a supplier to undertake the
activity.
Supply chain dependencies

Any stage of the supply chain in which a single supplier is dominant represents a risk
to the final buyer. Often, the customer is unable to fully recoup losses that are due
to supply chain failure—as they do not have supply agreements with suppliers
further up the supply chain.

Procurement officers need to be aware of such dependencies, and investigate the
impact a dominant supplier may have on the supply chain if the supplier restricts
supply, or if their performance becomes unsatisfactory. Subsequently, the agency
would need to manage the risk itself, or develop alternative approaches to ensuring
that an external supply chain manages the risk effectively. This might include
facilitating improvement in the existing supply chain; buying from a different level
within the supply chain; or choosing a supplier with a different supply chain.

Sustainable procurement

Sustainability impacts of products and services occur throughout the supply chain.
Therefore, in order to identify and to develop an understanding of areas of
sustainability impact, the complete supply chain of the products or services should
be examined.

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An understanding of the supply chain and the relevant players within it will assist
in identifying sustainability risks as well as opportunities for improved
sustainability outcomes.

Where to buy in the supply chain

Many goods and services required for day-to-day operations are purchased from a
retailer. However, there may be circumstances where the agency could realize better
value for money by approaching the wholesale market or the manufacturer directly,
and negotiating terms of delivery. The ultimate test of where in the chain the
purchase should be made is whether the price mark-up at the subsequent stage is
outweighed by the value added at that stage.

Table 11: Key areas to research4
What firms make up the supply chain?

What does each member of the supply chain contribute to the end product or service
(what is their level of value-adding)?

What are the key sustainability impacts along the supply chain?

What is each member of the supply chain doing to address key sustainability impacts
and to improve their sustainability performance?

How complex is the supply chain?

Are suppliers’ dependent on other suppliers for key components?

Is the supply chain risk best managed where it is currently managed?

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What are the delivery or transportation methods in the supply chain and are there
any associated risks, including products or services having high transport
intensity?

Is the current storage location the most appropriate? Are stock levels too high or low?

Are there any areas of supply vulnerability within the chain?

Are there more efficient or more sustainable sources of supply?

 Is the agency buying at the correct level in the supply chain?

The principles of market demand and supply and how these impact on the supply chain

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the
backbone of a market economy. Demand refers to how much (quantity) of a product or service
is desired by buyers. The quantity demanded is the amount of a product people are willing to buy
at a certain price; the relationship between price and quantity demanded is known as the
demand relationship. Supply represents how much the market can offer. The quantity supplied
refers to the amount of a certain good producers are willing to supply when receiving a certain
price. The correlation between price and how much of a good or service is supplied to the market
is known as the supply relationship. Price, therefore, is a reflection of supply and demand.
A. The Law of Demand
The law of demand states that, if all other factors remain equal, the higher the price of a good,
the less people will demand that good. In other words, the higher the price, the lower the
quantity demanded. The amount of a good that buyers purchase at a higher price is less because

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as the price of a good goes up, so does the opportunity cost of buying that good. As a result,
people will naturally avoid buying a product that will force them to forgo the consumption of
something else they value more. The chart below shows that the curve is a downward slope.

A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation
between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1
and the price will be P1, and so on. The demand relationship curve illustrates the negative
relationship between price and quantity demanded. The higher the price of a good the lower the
quantity demanded (A), and the lower the price, the more the good will be in demand (C).
B. The Law of Supply
Like the law of demand, the law of supply demonstrates the quantities that will be sold at a
certain price. But unlike the law of demand, the supply relationship shows an upward slope. This
means that the higher the price, the higher the quantity supplied. Producers supply more at a
higher price because selling a higher quantity at a higher price increases revenue.

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A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation
between quantity supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the
price will be P2, and so on.

Time and Supply

Unlike the demand relationship, however, the supply relationship is a factor of time. Time is
important to supply because suppliers must, but cannot always, react quickly to a change in
demand or price. So, it is important to try and determine whether a price change that is caused
by demand will be temporary or permanent.

Let's say there's a sudden increase in the demand and price for umbrellas in an unexpected rainy
season; suppliers may simply accommodate demand by using their production equipment more
intensively. If, however, there is a climate change, and the population will need umbrellas year-
round, the change in demand and price will be expected to be long term; suppliers will have to
change their equipment and production facilities in order to meet the long-term levels of
demand.

C. Supply and Demand Relationship

Now that we know the laws of supply and demand, let's turn to an example to show how supply
and demand affect price.

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Imagine that a special edition CD of your favorite band is released for R20. Because the record
company's previous analysis showed that consumers will not demand CDs at a price higher than
R20, only ten CDs were released because the opportunity cost is too high for suppliers to produce
more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise
because, according to the demand relationship, as demand increases, so does the price.
Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship
shows that the higher the price, the higher the quantity supplied.
If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up
because the supply more than accommodates demand. In fact, after the 20 consumers have been
satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt
to sell the remaining ten CDs. The lower price will then make the CD more available to people
who had previously decided that the opportunity cost of buying the CD at $20 was too high.
D. Equilibrium
When supply and demand are equal (i.e. when the supply function and demand function
intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its
most efficient because the amount of goods being supplied is exactly the same as the amount of
goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the
current economic condition. At the given price, suppliers are selling all the goods that they have
produced and consumers are getting all the goods that they are demanding.

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As you can see on the chart, equilibrium occurs at the intersection of the demand and supply
curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P*
and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.
In the real market place equilibrium can only ever be reached in theory, so the prices of goods
and services are constantly changing in relation to fluctuations in demand and supply.
E. Disequilibrium
Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*.
1. Excess Supply
If the price is set too high, excess supply will be created within the economy and there will be
allocative inefficiency.

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At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1,
however, the quantity that the consumers want to consume is at Q1, a quantity much less than
Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed.
The suppliers are trying to produce more goods, which they hope to sell to increase profits, but
those consuming the goods will find the product less attractive and purchase less because the
price is too high.
2. Excess Demand
Excess demand is created when price is set below the equilibrium price. Because the price is so
low, too many consumers want the good while producers are not making enough of it.

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In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2.
Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus,
there are too few goods being produced to satisfy the wants (demand) of the consumers.
However, as consumers have to compete with one other to buy the good at this price, the
demand will push the price up, making suppliers want to supply more and bringing the price
closer to its equilibrium.
F. Shifts vs. Movement
For economics, the "movements" and "shifts" in relation to the supply and demand curves
represent very different market phenomena:
1. Movements
A movement refers to a change along a curve. On the demand curve, a movement denotes a
change in both price and quantity demanded from one point to another on the curve. The
movement implies that the demand relationship remains consistent. Therefore, a movement
along the demand curve will occur when the price of the good changes and the quantity
demanded changes in accordance to the original demand relationship. In other words, a
movement occurs when a change in the quantity demanded is caused only by a change in price,
and vice versa.

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Like a movement along the demand curve, a movement along the supply curve means that the
supply relationship remains consistent. Therefore, a movement along the supply curve will occur
when the price of the good changes and the quantity supplied changes in accordance to the
original supply relationship. In other words, a movement occurs when a change in quantity
supplied is caused only by a change in price, and vice versa.

2. Shifts
A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes
even though price remains the same. For instance, if the price for a bottle of beer was R2 and the

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quantity of beer demanded increased from Q1 to Q2, then there would be a shift in the demand
for beer. Shifts in the demand curve imply that the original demand relationship has changed,
meaning that quantity demand is affected by a factor other than price. A shift in the demand
relationship would occur if, for instance, beer suddenly became the only type of alcohol available
for consumption.

Conversely, if the price for a bottle of beer was R2 and the quantity supplied decreased from Q1
to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift
in the supply curve implies that the original supply curve has changed, meaning that the quantity
supplied is effected by a factor other than price. A shift in the supply curve would occur if, for
instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced
to supply less beer for the same price.

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The impact of market factors on organizations

Major Market Forces

Government
Government holds much sway over the free markets. The fiscal and monetary
policies that governments and their central banks put in place have a profound effect on the
financial marketplace. If government spending increases or contracts, this is known as fiscal
policy, and can be used to help ease unemployment and/or stabilize prices. By altering interest
rates and the amount of dollars available on the open market, governments can change how
much investment flows into and out of the country.
International Transactions

The flow of funds between countries effects the strength of a country's economy and its
currency. The more money that is leaving a country, the weaker the country's economy and
currency. Countries that predominantly export, whether physical goods or services, are
continually bringing money into their countries. This money can then be reinvested and can
stimulate the financial markets within those countries.

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Speculation and Expectation

Speculation and expectation are integral parts of the financial system. Consumers, investors and
politicians all hold different views about where they think the economy will go in the future and
that effects how they act today. Expectation of future action is dependent on current acts and
shapes both current and future trends. Sentiment indicators are commonly used to gauge how
certain groups are feeling about the current economy. Analysis of these indicators as well as
other forms of fundamental and technical analysis can create a bias or expectation of future price
rates and trend direction.

Supply and Demand

Supply and demand for products, services, currencies and other investments creates a push-pull
dynamic in prices. Prices and rates change as supply or demand changes. If something is in
demand and supply begins to shrink, prices will rise. If supply increases beyond current demand,
prices will fall. If supply is relatively stable, prices can fluctuate higher and lower as demand
increases or decreases.

These factors can cause both short- and long-term fluctuations in the market, but it is also
important to understand how all these elements come together to create trends. While all of
these major factors are categorically different, they are closely linked to one another.
Government mandates can affect international transactions, which play a role in speculation, and
changes in supply and demand can play a role in each of these other factors.

Government news releases, such as proposed changes in spending or tax policy, as well as Federal
Reserve decisions to change or maintain interest rates can also have a dramatic effect on long
term trends. The lowering of interest rates and taxes can encourage spending and economic
growth. This in turn has a tendency to push market prices higher. However, the market does not
always respond in this way because other factors may also be at play. Higher interest rates and
taxes, for example, can deter spending and result in a contraction or a long-term fall in market
prices.

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In the short term, these news releases can cause large price swings as traders and investors buy
and sell in response to the information. Increased action around these announcements can
create short-term trends, while longer term trends may develop as investors fully grasp and
absorb what the impact of the information means for the markets.

The International Effect

International transactions, balance of payments between countries, and economic strength are
harder to gauge on a daily basis, but they also play a major role in longer-term trends in many
markets. The currency markets are a gauge of how well one country's currency and economy is
doing relative to others. A high demand for a currency means that currency will rise relative to
other currencies.

The value of a country's currency can also play a role in how other markets will do within that
country. If a country's currency is weak, this will deter investment into that country, as potential
profits will be eroded by the weak currency.

The Participant Effect

The analysis and resultant positions taken by traders and investors based on the information they
receive about government policy and international transactions create speculation as to where
prices will move. When enough people agree on one direction, the market enters into a trend
that could sustain itself for many years.

Trends are also perpetuated by market participants who were wrong in their analysis. When they
are forced to exit their losing trades, it pushes prices further in the current direction. As more
investors climb aboard to profit from a trend, the market becomes saturated and the
trend reverses, at least temporarily.

The Supply & Demand Effect

Supply and demand effects individuals, companies, and the financial markets as a whole. In some
markets, such as commodities, supply is determined by a physical product. Supply and demand

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for oil is constantly changing, adjusting the price a market participant is willing to pay for oil today
and in the future.

As supply dwindles or demand increases, a long-term rise in oil prices can occur as market
participants outbid one another to attain a seemingly finite supply of the commodity. Suppliers
want a higher price for what they have, and higher demand pushes the price that buyers are
willing to pay.

The financial markets have a similar dynamic. Stocks fluctuate on a short and long-term scale,
creating trends. The threat of supply drying up at current prices forces buyers to buy at higher
and higher prices, creating large price increases. If a large group of sellers were to enter the
market, this would increase the supply of stock available and would likely push prices lower. This
occurs on all time frames.

The Bottom Line

As stated above, trends are generally created by four major factors: government, international
transactions, speculation/expectation, and supply and demand. These areas are all linked as
expected future conditions shape current decisions and those current decisions shape current
trends. Government effects trends mainly through monetary and fiscal policy. These policies
effect international transactions which in turn effect economic strength. Speculation and
expectation drive prices based on what future prices might be. Finally, changes in supply and
demand create trends as market participants fight for the best price.

TOPIC QUIZ
I. Define markets

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II. Discuss the difference between perfect competition, imperfect, oligopolistic,
duopolistic and monopolistic markets

III. Analyse the impact of market competition on the procurement and movement of
supplies and services

IV. Define micro economics
V. Discuss demand and supply curves
VI. Identify and analyse shifts in demand and supply
VII. Describe the elasticity of demand and supply
VIII. Explain market change
IX. Analyse the impact of demand and supply on pricing and availability
X. Investigate the impact of product life cycles on demand

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KM-01-KT03: Approaches to external environment and its impact on the supply chain

KT0301 Analytical tools to explain the impact of the external environment on the supply
chain
KT0302 Economic criteria that impact on the supply chain
KT0303 Political and legislative criteria that impact on the supply chain
KT0304 Environmental and ethical criteria that impact on the supply chain
KT0305 Social criteria that impact on the supply chain

Analytical tools to explain the impact of the external environment on the supply chain

External factors:

(A) Top management commitment
The commitment at the top-level management is very important to make supply chain responsive
because their decision and strategies put effect on whole supply chain. If they are not committed
the overall coordination in supply chain cannot achieved. Decisions related to resources and IT is
also taken by Top Management. Culture of organization and training of employees and lean
production are some organizational factors that affect coordination. Trust, mutual
understanding, risk and reward sharing also effect coordination are Supply chain. Lack of
collaborative decision making also put effect on coordination.

The support from top management is necessary for coordination of different department within
an organization for training of employees; development of suppliers’ commitment from top
management is a key for responsive supply chain. Strategies for material, technology, time,
money, and power; also imposed by top level authority. Top level management commitment also
gives facilities of software applications, intranet and internet and other support systems. They

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also play a vital role in supply chain strategy formulation, because effective strategies make
supply chain successful

(B) Mutual understanding and Trust

Trust is a favourable attitude that exists when one supply chain member has confidence in other
supply chain member. Trust is required for flow of information in the supply chain. Risk and
reward sharing influence individual supply chain member’s behavior and his interaction with
other supply chain members. Conflicts of interest are likely to occur when existing risk and reward
sharing maximize individuals benefit in spite of the benefit of all the supply chain members. Trust
and commitment are essential for enhancing performance of supply chain in developing
countries. Conflicts in vision and goals of supply chain members result in the individuals profit
maximization in place of profit maximization of all the supply chain members.

(C) Information Sharing and Flow

Thatte (2013) defined “the extent to which critical and proprietary information is communicated
to one’s supply chain partner”. It refers to the access to private data between trading partners
that enables them to monitor the progress of products and orders as they pass through various
processes in the supply chain. Shared information can vary from strategic to tactical in nature
and could pertain to logistics, customer orders, forecasts, schedules, markets, or more. Some of
the elements that comprise information sharing include: data acquisition, processing, storage,
presentation, retrieval, and broadcasting of demand and forecast data, inventory status and
locations, order status, cost-related data, and performance status. Information sharing
pertaining key performance metrics and process data, improves supply chain visibility, enabling
effective decision making by firms. Information shared in a supply chain is of use only if it is
relevant, accurate, timely, and reliable. The bullwhip effect can be minimized or eliminated by
sharing information with trading partners.

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(D) Strategic Supplier & Customer Relationships:

Thatte (2013) defined Strategic supplier partnership (SSP) as “the long-term relationship
between the organization and its suppliers. It is designed to leverage the strategic and
operational capabilities of individual, participating organizations to help them achieve significant
ongoing benefits”. Supplier relationship management (SRM) is the discipline of strategically
planning for, and managing, all interactions with third party organizations that supply goods
and/or services to an organization in order to maximize the value of those interactions. In
practice, SRM entails creating closer, more collaborative relationships with key suppliers in order
to uncover and realize new value and reduce risk of failure.
Customer relationship (CR): CR is defined as “the entire array of practices that are employed for
the purpose of managing customer complaints, building long-term relationships with customers,
and improving customer satisfaction”. Customer relationship is considered as an important
component of SCM practices. Literature highlights several benefits of customer relationships:
success of an organization in SCM efforts as well as its performance, increased sales and profits
product differentiation from competitors, sustaining customer loyalty, and greater value
provided to customers.

Customer relationship management is a complementary process to the previous operations
process to achieve the organization goals, so that efforts will be fruitful if all previous processes
were coroneted of running a sound relationship with the customer. (Ellen, 2009) declared that
the 55-customer relationship is an essential 19 part of modern business management. And it
concerns the relationship between the organization and its customers.

(E) Organizational factors

Different organizational factors like organization structure, organizational culture, training of
employees. Some companies are working on JIT system in which raw material is provided at the
time of production. Some others are working on the concept of mass customization. Many

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automotive companies operate on a JIT system in which parts suppliers deliver parts several
times a day to the assembly line. Furthermore, some are applying mass customization based on
framework that is similar to those adopted by firms such as Dell Computer Corporation. In some
industries, mass customization requires a supplier to provide an original equipment
manufacturer with a wide range of variants of a given part. Other organizational factors affecting
coordination of supply chain may be lean organization structure, organization culture, cross-
functional training of employees

Economic criteria that impact on the supply chain

Economic optimization of supply chains

This task aimed at developing an optimization model to plan and design biomass supply chains,
as driven by an economic criterion, namely the profit generated by operating a conversion unit
processing lignocellulosic feedstock. This mathematical supply-chain model integrates and
optimizes the logistics system by choosing among different technology and management options
including transport routes, storage sites, pre-conditioning and processing technologies (e.g.
palletization or briquetting), harvesting (cutting date or type of technology used), and feedstock
type. Transportation distances are calculated with real road data, and the model can deal with
certain kinds of uncertainty, including in the demand on bio-based end-products. It runs on a
monthly basis and therefore captures the effects of seasonality in feedstock harvesting or
product demand.

The model was used to analyze and assess the economic potential and sustainability in the supply
chain given various scenarios in the two-major case-studies of the project: the Bourgogne Pellets
cooperative developing miscanthus in France, and the Miajadas bio-electricity plant in Spain. The
scenarios tested there included the supply of different feedstock types, different end-uses for
the produced biomass as well as the deployment of different harvesting, densification and
transport technologies for the logistics.

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Major outcomes:
1. Spatially explicit scenarios for feedstock supply (multi-feedstock / multi-level) in the 2
case-studies, as described in the following deliverable for France (miscanthus) and Spain
(sorghum, poplar, triticale, wheat straw)
2. The optimization model is described in this document, and is available on request from its
authors for optimizing, analyzing and assessment of activities along the biomass supply
chain
3. Optimal energy crops biomass logistics with respect to economic criteria for the 2 case-
studies in Spain and France
4. Analysis of economic potential and sustainability of improved technologies tested in the
project, as summarized in this fact-sheet

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Political and legislative criteria that impact on the supply chain

Supply chain management (SCM) is one of the key mechanisms enabling government to
implement policy. Traditionally, SCM has been misunderstood and undervalued. Its strategic
importance has not been recognized, and it has been under-capacitated.

The negative effects of inefficient public sector SCM, particularly in the procurement phase of
the chain, are well documented. Suppliers charge excessive prices; goods and services contracted
for and delivered are of poor quality and unreliable; and there is corruption and waste.

The private sector, by contrast, has tended to invest astutely in SCM in order to maximize
shareholder value and ensure that its products and services match clients’ needs. In South Africa,
government is starting to value the strategic importance of SCM to service delivery, value
creation, socio-economic transformation and fiscal prudence. The establishment of the Office of
the Chief Procurement within the National Treasury reflects government’s commitment to
quality service delivery at the right place and time.

This Public Sector SCM Review is a candid reflection on the current state of SCM in the public
sector; the reforms that are being considered; and the opportunities that an efficient and
effective system presents. The Review reflects the views of government, business and civil
society. It shows a growing appreciation that SCM reform will require collaboration and that it
should be treated as a national project. If it is implemented as envisaged in section 217 of the
Constitution, the benefits will be enormous:

 Good-quality service delivery will be increasingly possible, with significant
improvements in the welfare of South Africa’s citizens and especially the poor who rely
heavily on government for support

 The economy will grow as economic infrastructure is expanded and efficiently
maintained
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 Goods, services and infrastructure will be bought at lower costs
 Innovation will result in different approaches to the commodities used in some sectors.

Learning in primary and secondary schools, for example, could be accelerated through
the purchase and use of electronic equipment.
 For suppliers, the cost of doing business with the state should decrease substantially.

Transparency and open contracting are critical elements of any public sector SCM system. An
important part of reforming South Africa’s system must therefore be to make procurement
information accessible to suppliers and purchasers alike. This will enhance planning,
accountability and oversight.

The current public sector SCM situation A number of issues prevent public sector SCM from
performing as well as it should.

The strategic importance of SCM is not well understood. Those working in the system need to
understand the economic and social power of the purchasing decisions that they make. These
should not only be of maximum value to the intended beneficiaries – whether these are hospital
patients who receive the medication they need or commuters with access to good public
transport – but also give expression to government’s policies and strategies and support business
development. Translating budgets and strategic plans into deliverables requires an efficient
public SCM system which is well-resourced, functions efficiently and whose central importance
is recognized.
The organizational structures and systems within which SCM takes place are in too many cases
not ideal, with inexperienced or under skilled leadership, high staff turnover and lack of
motivation. There may also be a lack of suitable equipment, such as computers with dependable
internet connections; or information, such as databases giving up-to-date details of available
products and services.

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The lack of clarity about the roles and responsibilities of technical staff and of political officer
bearers creates scope for interference, and this gives rise to allegations or instances of
corruption.

SCM practitioners frequently do not have the skills, knowledge and experience that they need.
While the system contains many excellent people, competency assessments show significant
gaps in SCM skill and knowledge. This document gives information about some of the serious and
rapid steps being taken to address this problem.

There are few if any consequences for those who, despite support and encouragement, fail to
perform at the required level. Repeated negative reports by the Auditor-General (AG) highlight
this lack of accountability. An improved and more dynamic public SCM system should bring out
the best in its officials, and there must be consequences for those who are not willing to play
their part for the public good.

Policies and regulations are often confusing and cumbersome. Suppliers have to fill out numerous
forms, often many times. This costs time and money and is a particular problem for small
businesses with little or no administrative capacity or support. It is government policy to support
the growth of small businesses and the jobs they create. Procedures that stand in the way of this,
and which are also difficult for officials to interpret and implement, must and will be changed.

The public sector frequently underestimates how important supplier management is, and there
is limited understanding about how public-sector decisions and actions affect the overall business
environment. On the other hand, suppliers often take advantage of the current weak public
sector SCM environment. This is evident in high prices paid for goods and services; contracts that
favor certain suppliers; collusion; unethical behavior; non-performance; and poor-quality
products and services rendered. To overcome these problems, the public sector needs to develop
long-term strategic supplier relationships.

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