supply chain

 

Supply Chain

 

            A supply chain is a system of organizations, people, technology, activities, information                  and resources involved in moving a product or service from supplier to customer.

 

            Supply chain activities transform natural resources, raw materials and components into a   finished product that is delivered to the end customer.

 

            In sophisticated supply chain systems, used products may re-enter the supply chain at any             point where residual value is recyclable.

 

Supply Chain Management(SCM)

 

            Supply Chain Management is the oversight of materials, information & finances as they    move in a process from supplier to manufacturer to wholesaler to retailer to consumer.

 

            SCM involves coordinating & integrating these flows both within & among companies.

 

            SCM enables collaboration, planning, execution & coordination of the entire supply           chain,             empowering companies to adopt their supply chain processes to an ever changing   competitive environment.

 

            With better synchronization across the entire supply chain, the business partners achieve    the following major benefits:-

 

o   Lower Inventories & therefore lower financing costs

 

o   Shorter receivable cycles

 

o   Optimal use of production resources & costly workforces

 

o   Faster response to market changes

 

o   Greater satisfaction & loyalty among customers

Porter’s Value Chain Model-

The idea of the value chain is based on the process of organization, the idea of seeing a manufacturing (or service) organization as a system, made up of subsystems each with inputs, transformation processes and outputs. Inputs, transformation processes, and outputs involve the acquisition & consumption of resources- money, labour, materials, equipment, buildings, land, administration and management. How value chain activities are carried out determines costs and affects profits.

 

Most organizations engage in hundreds, even thousands of activities in the process of converting inputs to outputs. These activities can be classified generally as either primary or support activities that all businesses must undertake in some form.

 

According to Porter (1985), the primary activities are:-

 

Inbound Logistics: involve relationships with suppliers and include all the activities required to receive, store & disseminate inputs.

 

Operations: are all the activities required to transform inputs into outputs (products & services).

 

Outbound Logistics: include all activities required to collect, store & distribute the output.

 

Marketing & Sales: activities inform buyers about products & services, induce buyer to purchase them and facilitate their purchase.

 

Service: includes all the activities required to keep the product or service working effectively for the buyer after it is sold and delivered.

 

Support Activities are:-

 

Procurement: is the acquisition of inputs, or resources, for the firm.

 

Human Resource Management: consists of all activities involved in recruiting, hiring, training, developing, compensating and dismissing or laying off personnel.

 

Technological Development: pertains to the equipment, hardware, software, procedures and technical knowledge brought to bear in the firm’s transformation of inputs into outputs.

 

Infrastructure: Serves the company’s needs & ties its various parts together, it consists of functions or departments such as accounting, legal, finance, planning, public affairs, government relations, quality assurance & general management.

 

Competitive Advantage

 

A firm is said to possess a competitive advantage over its rivals, if it sustains profit that exceed the average for its industry.

 

The goal of much of business strategy is to achieve a sustainable competitive advantage.

Michael Porter identified two basic types of Competitive advantage:

                         

                         

                        Cost Advantage

 

                        Differentiation Advantage

 

Cost Advantage: Cost advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost.

 

Differentiation Advantage: Differentiation advantage exists when the firm is able to deliver benefits that exceed those of competing products.

 

Cost and differentiation advantages are known as potential advantages since they describe the firm’s position in the industry as a leader in either cost or differentiation.

 

A resource based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation.

Resources & Capabilities:

 

According to the resource based view, in order to develop a competitive advantage the firm must have resources and capabilities that are superior to those of its competitors.

 

Resources: are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily. 

 

Capabilities: refer to the firm’s ability to utilize its resources effectively. An example of a capability is the ability to bring a product to market faster than competitors. The firm’s resources & capabilities together form its distinctive competencies.

 

Porter’s Five Forces Model:

 

Michael Porter described a concept that has become known as the “five forces model”. This concept involves a relationship between competitors within an industry, potential competitors, suppliers, buyers & alternative solutions to the problem being addressed.

 

 

 

Threat of Potential Entrants: The threat of new entrants relates to the ease with which a new company or a company in a different product area can enter a given trade sector. Barrier to entry into a particular market include the need for capital, knowledge and skills. The barriers to entry for e.g. to the vehicle assembly sector are massive; to start building cars there is the need to develop a new model range, build a car assembly plant, contract a large number of component suppliers and sign up a dealer network. Getting into business in building personal computers is, in contrast, much easier; the components are readily available and there is not the same need for investment in product development or large scale production facilities before the company makes a start.

 

            Threat of Substitution: Substitution is a threat to existing players where a new product becomes available that supplies the same function as the existing product or service. The classic examples are the (partial) substitution of natural fibres such as cotton and wool by synthetic fibres or the replacement of glass bottles by a plastic alternative in some sectors of the packaging industry. Existing players can protect themselves by keeping their product up-to-date.

 

Bargaining power of Buyers:  For a business to be profitable the cost of producing and distributing its product has to be less than the price it can fetch in the market place. Where there are a number of competitors in the market or a surplus of supply the buyer is in a strong position to bargain for a low price and for other favorable conditions of trade.

 

            Bargaining power of Suppliers: The organization, while trying to get an adequate price from its buyers, will be looking to get favorable terms from its own suppliers at the next stage along the value chain. The organization’s ability to get a good deal is the mirror image of its position with its buyers. If the supply is plentiful and/or there are several suppliers it should get a good price. If the product is scarce or the number of suppliers that are able to meet its need is limited then the supplier is in a more favorable position.

 

            Competition between existing players: The final force is the completion between existing players in the market. The competition is to get the buyers and to trade at a price that produces an acceptable profit. That competition is won on the basis of the generic competitive advantage of cost or differentiation. The competitive position of each organization is determined by the deal it is able to make with the suppliers.