Aligning Product Strategy to Supply Chain Practices
Read this article. The authors study whether organizational products are aligned with optimal supply chain types. Besides the product, what other aspects must be analyzed when selecting a specific type of supply chain?
Background
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.