BUS606: Operations and Supply Chain Management

Defining supply chain management

Scholars on SCM have conceptualised the supply chain in similar, yet slightly differing ways. However, most definitions emphasise the importance of integrating supply chain activities that need to be managed, coordinated and integrated in a cost-effective manner to ensure the satisfaction of all concerned. The Global Supply Chain Forum define the supply chain as the integration of key business processes from end user through to original suppliers, and which provides products, services and information that add value for customers and other stakeholders. It includes upstream linkages, such as sources of supply, the internal linkages inside the organisation and downstream linkages such as distribution to ultimate customers. These activities are concerned with the integration of business processes from end user through to original suppliers that provide products, services and information and add value for customers.

Supply chain management is also defined as a set of approaches utilised to efficiently integrate and coordinate the materials, information and financial flow across the supply chain so that merchandise is supplied, produced and distributed at the right quantities, to the right location, at the right time, in the most cost efficient way, whilst satisfying customer requirements.

The concept of SCM has four major components that must be managed:

• The flow of physical materials from suppliers, downstream through the business itself and finally to distributors and/or customers.
• The flow of money upstream from customers back to companies and suppliers.
• The flow of information up and down the stream.
• The flow of products back (upstream) from the customers, typically for repair or recycling.
  

Supply chain management has thus evolved to become a much more sophisticated science with multiple upstream and downstream linkages that need to be carefully managed:

Supply chain management ... is the management, across and within a network of upstream and downstream organisations, of both relationships and flows of materials, information and resources. The purpose of supply chain management is to create value, enhance efficiency, and to satisfy customers.

In addition, SCM has also become an important tool for businesses to achieve competitive advantages.

Sutherland and Canwell define the supply chain as the integrated management and control of the flow of information, materials and services from suppliers of raw materials, through to the factories, warehouses and retailers, to the end customers. It includes all the activities that are involved in delivering products from the raw material phase to the customer, including the sourcing of raw materials and parts, production and assembly, warehousing and inventory assembly, order planning and order management, distribution across all channels and delivery to the customer. The primary purpose is efficient physical distribution of final products from manufacturers to end users in an attempt to replace inventories based on useful, up to date information.

Conversion of raw materials into finished products

The purpose of SCM is to support the transformation of raw materials and component parts into shipped or inventory goods, a cardinal activity for all craft businesses. Its main function is to provide goods and services as required by customer and also to provide form, time, place and quantity utilities. Integrating all supply chain activities may create competitive advantages for the organisation if such activities are run efficiently and effectively. This is because the decision by one supply chain member affects the activities of other supply chain members.

Cost-efficient supply chains require a reduction in inbound costs

The increasing demand for a cost-effective supply chain has put pressure on all businesses to cut costs. Therefore, a cost-effective supply chain is a means of survival for businesses as purchased goods and services account for 80% of sales revenue. Supply chain management serves to manage activities required for specific products, such that there is a significant competitive advantage in the production of quality products that are cost-effective. Thus, SCM is important for three reasons: to reduce inventory management, to increase customer service and to help build competitive advantages. Well-managed supply chains help create competitive advantages and lead to increased profit for the business through coordinated attention to costs, customer service, reduced inventory levels and reduced inventory carrying costs. Small businesses are less likely to employ a person to facilitate supply chain management as their operations are less sophisticated, which could lead to an increase in costs and, typically, to an unacceptable level of customer service.

The product strategies used by small businesses for gaining competitive advantages

Product strategy is concerned with the position of the product in the market, attributes and characteristics, its life cycle, buyer behaviour, price, promotion, distribution, customer service and packaging requirements. Decisions on product strategy are made at various levels – corporate, business and operational. Product strategy includes decisions on product assortment or mix, business unit decisions, product line, number of product per product mix or group, choice of target market, desired positioning and product attributes such as brand elements, product development and improvement, packaging and service level.

With large businesses, marketing managers are responsible for making marketing and product strategy decisions. With small businesses, owner-managers are responsible for various tasks including product development and management, product portfolio (range) management, marketing, production and purchasing, human resources and so forth. Smaller businesses have no choice but to centralise these functions and have limited specialisation because of fewer personnel available to specialise in certain functions. These managers of smaller businesses often lack the time, skills and expertise required to manage their product portfolios successfully and effectively. They become generalists instead of specialists because they perform all functions and therefore may not be able to specialise in all these areas.

Product brand strategies and development of brand equity

Product strategy decisions also relate to decisions about brand equity, which establishes a link between a business the new products offered because a business reaps the benefits of owning such a product brand. Brand equity is the term used to describe the value of a brand name and creates value for both customers and the firm. For example:

The brand can give customers confidence in the purchasing situation. Firms benefit enormously from having strong brand names. Investment in a brand name can be leveraged through brand extensions and increased distribution. High brand equity often allows higher prices to be charged; hence it is a significant competitive advantage.

Brand equity is thus very important and the research conducted amongst the craft businesses consulted revealed that not all of the craft businesses understood the value of brand equity and a brand name, nor did they actively utilise or develop brand equity.

Product brand strategies also look at how a product will be positioned in the market against competitors. As part of corporate strategy, businesses make decisions on the range and assortments of products to produce and market. A product assortment is a set of all product lines and individual products that a firm sells. It involves the selection of a range of components and the management of the product range by adding or removing of individual products within a range. Businesses also have to eliminate products that do not merit marginal evaluation or that are low sellers in order to make their procurement function and overall business strategy more efficient.

Effective product differentiation and diversification strategies

Businesses that differentiate their products from those of competitors create a competitive advantage over their competitors. A competitive advantage is the ability to deliver superior value to the market over a protracted period of time. A business achieves a sustainable competitive advantage when an attractive number of buyers prefer its products and services over those of competitors. Product assortment involves making decisions on the family, classes and lines of product to stock, product types per line, brands per type, items per brand within a product type, as well as the allocation of shelf space to each item. Some businesses also add different sizes, styles, colours, flavours or products as a way of extending their product lines and thereby differentiating themselves even further from their competitors.

Certain marketing specialists believe that product variety offers a business market power, which, in turn, increases the profit margin and market share; this has therefore led many businesses expanding their product lines. Expanding product lines is known as product diversification, which simply means the expansion of the product mix by adding new product ranges or items. It may also result into expanding to new markets and the introduction of new products. Ideally businesses – both large and small – try to develop products and services that are difficult to copy, which often results in a sustainable competitive advantage:

Sustainable competitive advantages provide the organisation with more time to exploit them in winning and keeping customers and in growing the business. These advantages represent the crown jewels of any organisation, providing the opportunity to create real competitive differentiation in the marketplace. 

Creating a real competitive differentiation in the marketplace is one of the obvious goals of the craft industry – each and every craft producer, supplier and seller tries to offer the market a product that is unique and/or difficult to copy.

Product diversification may lead to increased costs because new and different products with different features have to be produced. These products might require different equipment, expertise, machinery requirements, as well as a different supply chain, which may ultimately lead to increased costs. Although expanded product lines offer a business the opportunity to differentiate themselves, it also increases the level of complexity and increased costs of product fulfilment.

Although some small businesses do not want to grow, they all need to adapt to the changing environment and customer needs, even if they do desire to stay small businesses. For small businesses to grow, they need to recognise and exploit market opportunities through the use of advanced manufacturing systems, creating new distribution channels, products and services and customer segments. Small businesses often serve market niches and have narrow specialisation. They are known to introduce new products without prior research, which increases product failure as these new products have not been pre-screened or 'tweaked' based on focus-group feedback and surveys. They do not have well-defined strategies in place to manage the product mix or the new product development process. Although they are known to exploit market niches, some introduce new products and product lines in the hope of growing and sustaining their businesses. However, small businesses need to determine the right product variety to meet the needs of the market.

Small businesses have, in general, limited ability to compete because of a number of constraints such as the lack of access to technology, excessive costs of product development, ineffective selling techniques and market research, information gaps between marketing and production functions and excessive capital requirements. Most small businesses enter the market led by a single product or technology, without the significant finance required for broadening their product range.

The various classifications of innovation indicate that innovation can take place with new products (radical) or by making improvements to existing products (incremental). Incremental innovation happens when a business gradually improves its products, services and processes in response to customer needs, whilst radical innovation leads to the development of entirely different and new products, new processes and new markets.

O'Dwyer and Ledwith reveal that businesses which are good in bringing new products to the marketplace perform better and that those which are good at launching new products are likely to have those new products succeed. They often have advantages over big businesses in the sense that they are close to customers, work within an informal and flexible environment, have a risk-taking attitude and can quickly change and adapt to a new way of doing things – something which bigger businesses often find very difficult to do (although there are noteworthy exceptions such as the Apple Company with their innovative iPhone, iPad and iPod which were all radically different from other competitors' offerings when they first launched). The ability of small businesses to introduce new products in the market also creates opportunities in new niche markets, which is important for business survival.

Small businesses with long-term strategies were found to create and exploit new market niches with innovative products very effectively; furthermore, they were found to outperform those businesses who only changed their products gradually over a longer period of time. Big businesses are often content to survive in their original markets and often simply turn to existing products and markets, regardless of changes in the market and the external environments. Certain businesses survive and thrive through the releasing of new innovative products into the market whilst many large businesses simply maintain the status quo and offer few (if any) radical new product offerings.

Integrating product strategy and supply chain management for competitive advantages

An integrated supply chain requires continuous information flows which lead to best product flows. Supply chains are effectively designed during the product development stage, when product, process and information system decisions are specified and determined. Decisions, such as functionality of the product, packaging, logistical channels, source of materials, as well as selection of product and process technology, are also made during the supply chain design stage. New product design can often change one's design of the whole supply chain; new product designs can therefore often result in substantial changes to one's existing supply chain setup and process (from suppliers through production to final consumers).

Product strategy also includes the physical characteristics of the product, which, in turn, influences supply chain costs, such as storage, handling and transportation. As a result, an integrated supply chain will be more cost-effective for the business. This requires that one's product strategy must take into account supply chain requirements such as transport and storage, which leads to improvements in profits, or, if poorly executed, extra costs. Integrating and involving SCM early in the product design and development stages helps minimise overall supply chain costs whilst improving customer service levels and logistics performance. Supply chain management can be useful in differentiating a business from its competitors, and can also help create a marketing opportunity for a product that is supported by an effective and efficient supply chain.

Research by Khan and Creazza reveals the lack of integration in the supply chains of small businesses, especially the downstream linkages in the supply chain, through distributors and on towards retailers. Khan and Creazza further suggest the establishment of cross-functional teams for the development of new products, teams which involve all relevant resources to be included in the design process so as to enable small businesses to restructure their supply chain and to integrate it with product strategy. Lack of integration downstream can generate misalignments with the market, causing delays to the effective launch of new products – which could ultimately lead to new product failure. The integration of internal processes with external stakeholders such as suppliers and customers are essential for effective SCM to occur. Linking one's supply chain strategy to a business strategy requires one to carefully define the business and supply chain processes involved in producing a product or service. This might be a problem for some small businesses, such as those involved in craft production, where the owner manages the business, produces and market the products. Craft businesses are typically owner-managed and usually run by owner-managers with few (if any) employees. Certain businesses interviewed did however employ one or two employees within their businesses.