Supply Chain
Integrates all the parties and stakeholders, directly and indirectly, involved in fulfilling a consumer’s request.
What Is a Supply Chain?
A supply chain, or SC, integrates all the parties and stakeholders, directly and indirectly, involved in fulfilling a consumer’s request. It includes manufacturers, suppliers, retailers, warehouses as well as customers.
As a component of every company, the supply chain involves filling and receiving customer requests, including customer service, finance, operations, marketing, and distribution. Therefore, a constant flow of information must be maintained in the SC.
It has many stages, such as retailers, customers, manufacturers, suppliers, and distributors. Every stage in the SC is linked by the flow of money, commodities, and information.
Every SC aims to maximize the total value that is created. It is regarded as the difference between final product value and supply chain costs.
The formula indicates this:
SC Surplus = Perceived Customer Value – Supply Chain Cost
The value designated for the final product differs based on every customer, and it can be predicted by the highest amount a customer wants to pay for the product. The difference observed between product value and product price is consumer surplus.
The remainder of supply chain value derives from SC profitability which is the difference between revenue achieved and SC cost.
The profitability of the SC is the total profit that needs to be shared across every stage in the supply chain, and as the profitability increases, the success also increases.
An example of an organization with an effective SC is Dell Technologies. It had massive success due to a robust SC operation and design, although it was required to alter its technology to cater to the customer’s needs and market changes.
Across 13 years between 1993 and 2006, Dell was presented with immense profitability by having a designed SC that granted customers affordable PCs.
Understanding Supply Chain
Effective management of an SC mandates several decisions that relate to the information and product flow to raise its surplus. This includes:
- Strategy
- Planning
- Operation
A company determines how to evaluate its value chain over the next few years by choosing resource allocation, performance stages, and configuration. This decision is a long-term one, and it is expensive to change.
Companies need to consider the uncertainty in expected market changes over the next couple of years.
The next decision is planning, where decisions that are made here involve a fixed timeframe of between a few months to a year. The end objective of this stage is to make the supply chain more efficient.
The decisions made include markets for supply, inventory policies, size of marketing, and manufacturing subcontracting. In addition, companies must consider demand uncertainty, competition and rivalry, and exchange rates.
Operations in the SC are daily or weekly, where companies decide on customer orders and requests. The planning policies are clarified at this stage. This step includes handling orders from customers in the best way.
Firms either allocate inventory and then set a date for filing an order, create a pick list stated within the warehouse, and then set a delivery schedule for trucks. These are short-term decisions, so they have less instability regarding information related to demand.
The goal of this stage is to reduce uncertainty and enhance operational performance. All three stages have a crucial effect on the company’s profitability and growth.
The example of large retail chains such as Walmart experiencing success is due to the design, planning, and operation efficiency.
Supply chain Examples
Some of the examples are:
ZARA:
- Zara is a fashion retail chain owned by Inditex and headquartered in Spain. 2009 was Zara’s most successful year in operation due to achieving 11 billion euros from over 4,700 outlets in 76 countries.
- Zara has tremendously accelerated its growth using a strategy responsive to ever-changing trends with cost-effective prices. As a result, Zara’s sales cycle is between 4 to 6 weeks, in contrast to the industry average of 6 months, allowing it to benefit from operational efficiency.
- Thus, Zara can produce new designs each week and change ¾ of its fashion products every few weeks. Its clothing products match consumer tastes and preferences more than its rivals, leading to a sustainable competitive advantage.
- It manufactures its clothing using a range of flexible options in Europe and affordable sources in Asia. In addition, the fast-fashion chain has invested large amounts in IT to ensure high sales data is available for production decisions to improve operational efficiency.
- Amazon is an online retail giant traditionally used to sell books and music. However, it diversified and expanded its operations over the Internet to drive online sales.
- Originally headquartered in Washington, Amazon began by manually completing all orders using books purchased from a distributor by responding to client requests.
- Due to its growth and increasing sales, Amazon added additional warehouses to respond rapidly to customer requests.
- By 2009, Amazon occupied over 20 warehouses in the United States, with an additional 30 globally, where it used FedEx and UPS to send its goods to customers.
- After introducing the Kindle for e-reading, digital books opened a new market for growth for Amazon to increase its sales, where more than 450,000 books were sold digitally online.
- After significant success and incremental growth, Amazon expanded its online product range and diversified into books, toys, music, and jewelry. It is now a leading online seller of global products and distribution networks.
Strategic Fit
It mandates that both the value chain and competitive strategies share the same goal and that there is a consistency between consumer priorities and capabilities within the SC.
Both functional and competitive strategies need to align to form a coordinated strategy where every functional strategy mandates the support of other functional strategies and helps a company achieve its goal.
It also needs to be structured well regarding resources and processes to execute a successful strategy.
The design of the value chain and the role of every stage need to be unified to support the strategy of the value chain.
An organization fails due to the lack of a strategic fit or due to SC design, planning, and operational deficiencies needed to support the strategic fit of the company.
A strategy for a company is the set of needs of a customer that is needed to achieve using products and services such as Walmart providing a high selection of products at low prices.
Strategic fit consists of 3 key steps, including understanding uncertainty, capabilities, and achieving the fit.
An organization needs to understand the customer's needs for every target segment and the uncertainty it adds to the SC. This helps the firm define its requirements for service and costs.
A company also needs to comprehend the strengths of the value chain and evaluate which tasks it can do well. This will lead to achieving a strategic fit where a restructure in the value chain is needed to aid the competitive strategy.
To execute the competitive strategy, every aspect of the value chain needs an independent strategy to achieve a competitive advantage with a strategic fit successfully.
Drawbacks and Challenges Of Supply Chain
An SC has several complex challenges, including:
1. Lack of transparency
Having greater transparency allows stakeholders to comprehend the SC and understand the mechanisms and dynamics of the operating system. However, there may be a lack of it which can result in business failure and inconsistencies in coordination between functions.
2. Waste production
There is also waste production that arises from overactivity in the SC. Thus, there may be an overstock in inventory, leading to greater inefficiencies and lower productivity and performance in the SC.
Increased waste can lead to waste of resources and poor allocation of utilities. This can decrease operational success and cause bureaucracy within the system, and such a slowdown can give rise to sluggish growth.
3. Lack of stakeholder satisfaction and high customer expectations
Another drawback is that some unhappy customers and stakeholders carry unfulfilled expectations if a need is unmet, leading to lower satisfaction rates and negative publicity for the organization when not sufficiently managed.
Customer happiness is important for maintaining customer loyalty and retention to prevent a loss of sales. In addition, a positive relationship between customers and the organization can be generated by filling customer orders and requests on time.
4. Lost products
Delayed products or those lost in the supply chain are a drawback since a fault in the system can lead to lower customer satisfaction, profitability for the business, and slower SC efficiency.
Combinedly, challenges, and drawbacks such as producing waste, poor transparency, high expectations, and product losses can result in an inefficient and slow supply chain process, causing massive repercussions for the business itself.
COVID-19 and Global Supply Chains
The global pandemic was not only a health crisis but also an economic crisis. COVID-19 sped up the current underlying issues in the SC and posed a disruption across various sectors such as health, finance, trade, and education.
International value chains have consistently been exposed to vulnerabilities in exporting nations, including trade wars, political instability, and COVID-19. It is due to factors that hinder the flow of products and services from exporting nations.
Moreover, COVID-19 has impeded international activities across global economic sectors due to governmental protocol to adopt lockdown measures as a health strategy to reduce the effects of COVID-19 on people.
Lockdown measures include restrictions on the movement of products, stoppages in production, constraints in logistics, and trade slowdowns.
The pandemic was initiated in Wuhan, China, on 31 December 2019. There were 22 million cases by August 2020. Being a key manufacturer, China had its trade routes halted due to the emergence of COVID-19.
Although there were halts in SC and the balance of trade, consumer demand and new product innovation increased. Pharmaceutical companies and the consumer goods sector had vast benefits due to their products being essential with high demand.
There have been adverse effects, such as the distribution of finished goods by manufacturers being stopped due to the lack of raw material sourcing from global suppliers. The lockdown affected the retail, wholesale, and distribution sectors.
Non-essential goods have especially suffered due to the pandemic amid an economic slowdown.
It impacted the SC industry, which caused inflation and less production of goods and services across the value chain.
Global measures have been taken to efficiently measure production in the value chain and deliver it to customers. These include producer partnerships, order take-up by customers, and delivery companies.
An efficient and high-performance SC system promises good quality service, quality surpassing control, and a rapid cycle of production, as well as a financial performance improvement.
To reduce the negative effects of COVID-19 on company activities, key industry players in transport and logistics need to use innovative measures in distribution while engaging in partnerships with companies in the SC.
Summary
A high-performing supply chain is an essential component of any organization’s smooth operation and filling of customer orders.
Without its smooth functionality, the organization’s functions and performance would be halted by an impediment in the system.
As seen, COVID-19 significantly impacted global supply chains, especially international manufacturing and distribution of products and services.
Essential goods and pharmaceutical companies mostly benefited from a pandemic, including toilet paper, water, and flour.
On the other hand, non-essential products suffered from the pandemic’s effects and withstood a decline in sales and revenue; as such, the consumer goods industry endured a rapid decrease in profitability.
To succeed, a company must make an effort to optimize the most sustainable and environmentally friendly practices in its supply chain to ensure growth, a competitive advantage, and a strong market position moving forward.
Researched & Authored by Haniya
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