1.0 Background
and introduction
The design of supply chains can greatly
influence the level of competitiveness of an organization in the market. As the
pressure for businesses to become more competitive pile, supply chains around
the world are evolving with most organisations embracing complex networks aimed
at ensuring that the creation of value and customer service are uninterrupted
(Palit, 2007). This has called for a creative application of theories and
management concepts that commonly govern the design of supply chains such as
Just-In-Time (JIT), lean manufacturing, material requirements planning (MRP),
theory of constraints, and Total quality management (TQM) among others (Ketchen
and Hult, 2006). Just in Time and MRP concepts tend to emphasise on the need to
control inventory and avail raw materials in time. The theory of constraints
and total quality management concepts emphasise the need to focus on the entire
supply chain and ensure that all participants in the supply chain play their
role effectively and in a manner that ensures that there is synergy in the
production process (Ketchen and Hult, 2006).
The
business environment is increasingly competitive with pressure mounting on
organisations to creatively structure their supply chains to lower unit costs
and facilitate price competition. Globalisation has also promoted the ease of
movement of products and factors of production across national boundaries in a
manner that allows for global supply chains to be established (IBM, 2008). It
should also be appreciated that advancements in technology allows for better
networking systems that allow for establishment of complex networks in supply
chains, increased outsourcing of part or entire supply chains and reduced
tendencies to pursue vertical integration.
This
paper highlights recent changes in supply chains around the world and brings
out the drivers behind such trends. The paper also discusses the tradeoffs that
are considered when designing supply chains.
2.0 Drivers
behind recent trends in supply chains
As will be seen from the information below,
technology plays a key role in the evolution of supply chains around the world.
Manufacturing processes, communication systems, and inbound logistics are among
the greatest beneficiaries of advanced technology (Pochard, 2003). Network and
inventory maximisation, Radio Frequency Identification, logistics optimisation,
manufacturing optimisation, business intelligence, demand planning, and
procurement systems are among the applications of technology that significantly
impact supply chains (Supply Chain Management, 2012). The main drivers behind
recent trends in supply chain structures are as outlined below:
2.1 Increased focus on customer satisfaction and demand
driven models
The market is steadily gravitating towards the
customer as the centre of their business activities. Earlier areas of focus in
the past tended to lean on production efficiency where quality and quantity
were the sole focus (Supply Chain Management, 2012). This model was found to be
uncompetitive especially where the production processes were not in line with
the movement of demand in a manner that often ended up in the accumulation of
periodic shortages and surpluses (Supply Chain Management, 2012). Demand driven
supply chains help have been found to be more competitive with companies around
the world adopting demand planning systems. These require the establishment of
accurate demand forecasts, a feature that can easily be achieved with sophisticated
systems that factor in the input of all the members of the supply chains. This
is made possible through technology and systems that enables accurate demand
forecast and planning.
2.2 Globalisation
The growth of a global market where products and
factors of production can move across national boundaries with ease makes it
easier for organisations to adopt a global approach in their supply chains
(Hitachi Consulting, 2009). Organisations are increasingly opting to base their
labour intensive processes in countries where the cost of labour is lower and
later export the finished products to their target customers in different parts
of the world. The move to globalise supply chains is also necessitated by the
need to overcome supply chain risks where a situation in one country or region
could lead to the impairment of part or whole of the supply chains (Hines,
2004). For instance, an organisation whose suppliers are based in a country
that has recently suffered a massive earthquake may be forced to cease
operations while sourcing for new suppliers. Such a problem can be overcome
through the creation of supply chain networks that are distributed across
different parts of the world. Globalisation of supply chains is made possible
by improved communication systems.
2.3 Increased competition and price pressures
Technological advancement in recent times has
revolutionised the speed with which product development is conducted. The
ability of companies to quickly replicate or come up with similar product features
has rendered many products in the market commoditised (FM Global, 2006). This lack
of the ability to differentiate products and brands based on product features
leaves organisations with price as the only other avenue for remaining
competitive (Supply Chain Management, 2012). Where differentiation is possible,
organisations are able to charge higher prices and therefore be able to make
decent profits even where their operations remain costly. However, with the
increase in price competition around the world, it becomes necessary for
organisations to review their supply chains in a manner that ensures that the
unit cost of their products is maintained at the bare minimum (Cohen, 2011). It
is only then that they are able to price their products competitively and make
the desired profits. Moves to consolidate manufacturing plants as well as
relocation of facilities to low cost countries are among the measures taken by
organisations to lower their operation costs. China
and India
have remained some of the most attractive destinations of organisations
redesigning their supply chains to lower their operation costs (Ballou, 2012).
These pressures have also created a
situation where organisations are increasingly evaluating their operational
models and working to determine how best their costs can be lowered. These
revaluations have created a trend where organisations are opting to outsource
more and more. There is a trend towards the diminishing of the importance of
the term ‘core activities’ with many organisations tending to outsource even
the functions that would have normally been considered to be core functions
(Supply Chain Management, 2012). There is a growing trend towards less emphasis
of vertical integration as organisations appreciate that certain suppliers have
an absolute advantage over the production of certain goods and services that
form part of their supply chains. The role played by technology should also be
appreciated while evaluating the growing popularity of the practice of
outsourcing part or the whole of the supply chains (Stadler and Kilger, 2004).
Historically, organisations would emphasise on being in control of large parts
of their supply chains in order to reduce the risk of interruptions that would
normally be associated with communication breakdown and other inefficiencies
(Tseng, Taylor and Yue, 2005). However, with the entry of technology,
information on timing, production schedules, product specifications and other
crucial information necessary for coordination can be transmitted effectively.
Technology also allows for the establishment of systems that help in monitoring
the components of the supply chain and prompt identification of weaknesses with
the aim of rectifying any problems arising in consistency with the
recommendation of the theory of constraints (FM Global, 2006).
2.4 Shortened and more complex product life cycles
Increased competition among market players as
well as heightened expectations among customers has radically changed product
lifecycles. The cycles tend to be relatively short and often complex with the
underlying requirement being the need to quickly translate unsatisfied market
demand into products with speed (Chopra and Meindl, 2006). The shortened life
cycles also have the implication that the market may not allow for adequate
time for the innovating companies to recoup their investments into R&D
before the product features are either replicated or the customer’s attention
is drawn towards newer innovations in the market (Ballou, 2003). This therefore
puts supply chain managers in a situation where they must ensure that the
market needs are met while also checking on the cost of new product development
processes. Supply chains are therefore increasingly being designed to lower the
cost of new product development as well as to ensure that the processes lead to
speedy innovations.
2.5 Need for closer integration and collaboration
with suppliers
In the increasingly volatile market place,
organisations are finding it necessary to integrate and collaborate more with
players in their supply chains. Supply chains are turning into networks through
which individual companies can yield a competitive advantage. In such networks,
the focus is on the satisfaction of customer needs where the different players
are required to gather information on demand trends, changing perceptions in
the market, customer needs and other aspects and share it with other members of
the supply chains in line with the established information sharing frameworks
(Cooper, Lambert and Pagh, 1997). By integrating their processes, organisations
can make informed decisions in a timely manner hence have an edge in
identifying and attending to customer needs in the market. This is one of the
dimensions that could easily transform the supply chains into sources of
competitive advantage in line with the resource based view of the firm. This
view envisions organisations as bundles of resources which are combined to
yield the desired goals where resources include physical assets, human resource
and other resources on which an organisation could exert its influence
(Halldorsson, et al., 2007). The fact that the organisation has influence over
the systems of the members of their supply chains qualifies such systems as
resources that the individual companies could use in order to yield a
competitive advantage. This advantage can be achieved through prompt
identification of customer needs and generation of prompt solutions to such
arising needs.
3.0 Designing of
structures of supply chains and tradeoffs
The structure of supply chains should be
consistent with the overall orientation of the organisation in terms of its
commitment to satisfy customer needs as well as its approach to remain
competitive in the market (Storey and Emberson, 2006). Among the competing
factors in determining the structure of supply chains are location factors,
logistics and cost labour.
Products can either be standardised or complex
and largely customised to meet the needs of individual customers. Organisations
tend to prefer to locate their production facilities for complex products near
customers who in many cases tend to value timely delivery. The minimisation of
transport costs is also a crucial advantage where such location decisions are
taken. However, such decisions come at a cost to the organisation, especially
where such production facilities have to be located in the developed economies
where the cost of operation is quite high (FM Global, 2006). The need to keep
production facilities closer to the target market also presents the question of
whether or not to consolidate organisation functions. By focusing on the
proximity to the desired customers, organisations tend to have disjointed
facilities with several outlets conducting similar functions. This often leads
to higher costs in terms of labour, coordination and other inbound logistic
implications. The resultant higher costs in turn lead to a situation where such
organisations have to pursue a premium pricing strategy in a move that makes
them vulnerable to competition (Simchi-Levi, Kaminsky and Simchi-Levi, 2007). A
move to consolidate would on the other hand save on operation costs while
denying the organisation of the advantage of being in proximity to their
customers.
Organisations
may also opt to prioritise the cost of operations and opt to locate their
facilities to low cost regions where the cost of labour is much lower. This
approach has been embraced by many organisations in the manufacturing
industries around the world that have established factories in locations such
as China and India where the cost of labour is much lower (Kouvelis, Chambers
and Wang, 2006). This gives them the opportunity to minimise their unit costs
and the ability to price their products competitively in the market. However,
such moves come at a cost in terms of transportation and outbound logistics. It
also heightens the risk of delay especially where inefficiencies in the
transportation systems delay the delivery of products and raw materials to
their intended destinations. The decision on whether or not to relocate
manufacturing facilities offshore should therefore be considered very
carefully. Location advantage can also be generated through establishment of
facilities in locations where many other organisations produce similar products
(Mangan, Lalwani and Butcher, 2008). Such production hubs provide numerous
advantages in terms of access to market intelligence, lower procurement costs
and the ability to coordinate with members of the supply chain among others.
The
structuring of a supply chain could also be designed to overcome the risks
associated with supply chains. Common risks may include natural calamities in
given countries or regions, recession in the economies in question, and other
country specific factors (FM Global, 2006). These factors heighten the risk of
interruption of production which could in turn lead to devaluation of brand and
loss of revenues. Organisations enjoying the advantage of having concentrated
supply networks should therefore remain alive to this likelihood. Those
intending to limit the risk often tend to opt for global supply chains. With
global supply chains, suppliers and other crucial players in the supply chains
are distributed globally. This ensures that the organisation remains unaffected
by inconveniences experienced in particular markets. However, the use of global
supply chains requires substantial investments in communication and
coordination networks (Mangan, Lalwani and Butcher, 2008). It is also prone to
disruptions especially where materials have to be transported for long
distances.
4.0 Conclusion
and recommendations
Supply chains have been evolving constantly
with the most recent trends being closely linked to an improvement in
communication and manufacturing technologies. Supply chain structures can make
or break the organisation and they are increasingly being used as sources of
competitive advantage for organisations. Synergy among members of a supply
chain tends to be difficult to replicate and this forms the basis of the
assertions that supply chains can be used as sources of a competitive
advantage. Recent developments have seen the customer take the centre-stage
with organisations adopting a demand-oriented approach in the design of their
supply chain structures. The need to
remain relevant to the market has also influenced changes in supply chains with
organisations tending to adopt models that allow for a meaningful partnership
with the members of their supply chains. Other drivers of recent developments
in the supply chains around the world include heightened competition and the evolution
of product lifecycles to create shorter and more complex product lifecycles.
Competition and subsequent developments in production technologies have greatly
reduced the ability of organisations to differentiate their products over long
periods of time and that leaves them with the option of redefining their supply
chains as their only other avenue to remain competitive. At the centre of all
these changes is technology. Technological advancements form the basis or at
least play a major role in enhancing the drivers outlined.
The process of designing supply
chain structures should begin with the identification of the needs of the
organisation and the preferences of their customers. This should be followed by
the identification of the alternatives available and the evaluation of the
choices. The tradeoffs under consideration should be weighed carefully against
the organisation’s priorities before a decision on the most viable alternative
is made. In the end, a good supply chain is one that helps to yield a
competitive advantage for the organisation.
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