BUS606: Operations and Supply Chain Management

Management of multiple upstream and downstream linkages

The integration of the supply chain, with closer linkages occurring between suppliers and customers is increasingly becoming a reality of modern supply chains and business enterprises. Companies nowadays have expanded their planning and control perspectives to include 'upstream' (suppliers) and 'downstream' (distributors and customers) entities. The integration of market-driven strategies with supply chain strategies has become a focus of many businesses in recent times as they strive to offer superior customer service. Indeed, in the modern era of SCM, organisations are more 'integrated with their suppliers and customers in order to manage the total supply chain from raw materials to the ultimate customer, the only source of revenue'.

The challenge facing modern businesses – both large and small – is to constantly develop products and services that meet the ever-changing needs of customers. All businesses today face competitive challenges and one's product strategy – in terms of stock keeping units (SKUs) kept – impacts on cash flow and other business dimensions. Businesses constantly have to decide on the number and types of products to offer in the market, as well as how to manage these products more effectively in the presence of competitors and turbulent external environments. One of the key interfaces between marketing and logistics is deciding on the size and range of product offerings. The different perspectives of marketing and logistics becomes a cardinal concern when one has to decide how many SKUs to hold:

Marketers often prefer to carry higher quantities of particular items because this reduces the likelihood of stockouts (being out of stock at the same time as there is a demand for it). However, from a logistics perspective, higher quantities of inventory (1) necessitate additional storage space and (2) increase inventory carrying costs.

Therefore, the challenge facing all businesses is to make sure that they, (1) carry stock the market wants and needs, (2) in the right volumes and (3) that are sufficiently differentiated from competitors so as to give them a differentiating 'edge' in the marketplace.

Product differentiation as a key focus of successful business strategy

In the craft business, which is the focus of this article, product differentiation is a key positioning strategy because customers (often international or local tourists) must be convinced to purchase 'your' particular and unique product that is offered:

Many basic differences exist between the kinds of products marketed in the various segments of the economy. Some products in the competitive segment are undifferentiated (not distinguished by specific differences), whilst other products are differentiated. In some cases the products are intrinsically different (differentiated); in others, manufacturers are successful at making their products appear different from those of their competitors. Even in those cases where a product cannot be made different in substance, producers can get premium prices if they persuade customers to believe that their products are superior.

In layman's terms, three 'categories' of product differentiation would apply to the craft industry. Firstly, the products that are actually different from other crafts available in craft shops or tourist 'flea markets'. Secondly, some suppliers or manufacturers can make some products appear different from their competitors when very few differences are actually present. Thirdly, some suppliers or sellers of crafts can simply make their customers believe that their products are different from other competitors, when in fact they are virtually identical. The power of persuasive marketers or salespeople would obviously be paramount in the third example because one would have to influence the perception of the customer in such a way that they would indeed think or believe that one's product was actually different (when in fact it was not!).

As businesses (including craft businesses) offer a wide variety of products, appropriate SCM strategies must be put in place and integrated with product strategy in order to create competitive advantages. This is because one single supply chain strategy cannot be applicable to the different types of products and markets that a business sources. In order to offer a wide variety of products to the craft industry, one's product or service strategy must be fully integrated with the supply chain. A fully integrated and well-coordinated supply chain will result in craft supplies being created and produced on time for demand (lead time management), created according to the unique and ever-changing needs of a diverse customer set, as well as being produced in a cost-efficient and profitable manner for the ultimate seller of the crafts. Hugo and Badenhorst-Weiss underscore the essential need for demand-driven sales planning, lean manufacturing and the integration of processes which will result in reduced cycle times for both large and small businesses.

Structuring the supply chain for product differentiation, product range, profitability and customer satisfaction

The craft supply chain – as is the case with any successful supply chain – needs to be structured such that it supports a successful business unit, a particular product range or a specific item that is sold. The design of supply chain activities depends on the product strategies being adopted. If one is going for mass-produced products, then very little product differentiation takes place as all products manufactured should be identical. However, in the craft industry, product differentiation is of paramount importance and will influence whether the final customer either purchases one's product or not.

The ability of the supply chain to offer a uniquely differentiated craft product places additional pressure on the producers of such products and they must constantly explore new and unique (different) ways of manufacturing crafts that customers will like and buy. It has been observed by the researchers that when a craft maker produces something unique and different for the tourist craft market, it is simply a matter of time before a number of 'copied' imitations appear in the craft market. The early innovation is quickly followed by replicators – and the replications then quickly become mass produced – until such time as the tourist no longer purchases these replications. The innovation cycle then begins again with a new innovation which is offered to the tourist market and shows early success, only to be imitated once again by fellow competitors. Product differentiation strategies thus form the basis for supply chain development and should be determined based on the understanding of customer requirements, competitor offerings and unique product offerings.

Current supply chain management and product strategy research often favours larger businesses

Research on SCM and product strategy has principally focused on large (multinational) businesses. The impact of SCM on the product strategy of small businesses has not been extensively researched. This is particularly the case with small craft businesses where product design and development are regarded as two separate functions that cannot be integrated.

Craft businesses often design and produce unique products first and foremost and then decide on the markets and customers as an afterthought. Most modern multinational large businesses would seldom, if ever, do this. Rather they will first conduct thorough market research through lengthy questionnaires, focus-group analysis and product sampling and testing, before even considering launching the new product offering in the marketplace. As there are often vast sums of money (research and development funds) invested in such product roll-out strategies, they minimise their risk of market success by carefully, and meticulously, first testing the customer's response to their proposed product prior to launching it in the intended market (through target-marketing as well as random sampling and testing and a host of other market research techniques).

The methodology of new product design and development strategies of small craft businesses is significantly different to large, sophisticated enterprises with extensive capital at their disposal to do extensive pre-launch testing and related product development. Not only do small craft businesses often consider their customer market after their product has been created and even manufactured, but they also only often factor in how the product will be sourced and supplied (or manufactured) in the post-design phase of the product's life cycle. The supply chain activities of small craft businesses are therefore often more reactive rather than proactive. Small businesses, according to Vaaland and Heide, often do not employ SCM effectively and small craft businesses are no different in this respect. As a result, small craft businesses often face various logistical and supply chain challenges such as excessive inventory, poor customer service, declining profits and escalating costs.

Effective lead time management is well-acknowledged with large enterprises but is also critically important in small craft businesses. As consumers demand lower prices and higher quality products and services, retailers, manufacturers and distributors are under pressure to achieve greater cost-efficiencies and improve lead times, which makes supply chain efficiency a key factor in gaining a competitive advantage. The benefits of an integrated supply chain are that it leads to reduced inventory costs, higher quality products and higher customer service levels. Understanding and identifying appropriate supply chain techniques requires one, firstly, to know which products will sell most frequently and, secondly, which market segments exist, because clearly defined product strategies are key to the establishment of an effective supply chain.