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?
Literature review
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.