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Which is the best Supply Chain strategy for my business?

Article written by: PhD. George Ogrinja, Supply Chain Director, Associate Professor Faculty of Economic Cybernetics, Statistics and Informatics, ASE Bucharest

1. Where do we begin?

Business tendency to tranform the competition between the two companies into a Supply Chain-to-Supply Chain competition (groups of companies allied with common objectives along the entire supply chain-production-delivery) led us to approach designing a Supply Chain in competitive terms.

In a previous article entitled Supply Chain Management Practices we have showed that, Supply Chains are composed of processes, rather than discrete tasks, activities and processes unfolding usually beyond the boundaries of a functional, departmental organizational structure and allowing internal activities to align strategic objectives of the company. We remind that a process consists of a set of interdependent tasks and activities designed to achieve a specific goal or result. For example: Order Fulfillment (fulfillment of the customer’s order), Supplier Relationship Management (selection, evaluation and management of relationships with suppliers), Demand Management (planning and demand-side management), etc. are part of the SC’s processes, a company’s internal or external partners processes.

Business partners that support these processes are sometimes certain geographical areas or different cultures. But what is important, only a correct strategy of SC enables a company and its partners to gain a profitable business growth.

So, as a result of the transition from a SC focused exclusively on reducing costs to a customer oriented COMPANY and now to a strategic oriented business, the strategical thinking in the design and development of a SC has become more important than ever.

First, the strategy of the SC is only part of the overall business strategy of a company, all the other components being strategies presented in Figure 1.

Art1Fig1 - en

Figure 1. The competitive strategy of a company (adapted by Chopra and Meindl , 2010)

As you can see, functional strategies (Marketing and Sales, Supply Chain, etc) are all directly related to the company’s strategy to ensure its competitive development, at the individual level and as a member of the SC.

Observation: Strategic Alignment is obtained when the company’s strategy and development strategy of the SC have the same objectives. Very often, the people in charge of SC bring improvements in the system, without knowing the company’s strategy!

In this context, for the question of “from where do we begin designing a SC?”, the answer is: correct alignment of the SC with the company’s strategy is the starting point in designing a COMPANY geared towards ensuring a high level of competitiveness and business performance.

Most companies develop a SC strategy after its business strategy has been defined. This approach is partially correct, because it does not allow infusion of SC strategy options which can bring significant improvement to the business strategy (see biunivoque relationships between functional strategies and general strategy of the company in the graph in Figure 1).

Observation: Develop an interactive strategy for the SC and the company, according to the graph in Figure 2 to achieve a high level of competitiveness.

cupply chain strategies

Figure 2. Interactive Development company strategies

2. How does the business strategy of the company influence the SC model?

To understand, let’s review some of the basic concepts of the business strategy of a company. What is the strategy of a company’s competitiveness? Implementation of a correct strategy of competitiveness may be the key to success in business. The importance of competitiveness in the business strategy of a company was outlined by Porter (1985) Treacy and Wiersema,(1997). Later it was developed by many economic papers, an approach more close to our goals is being found in the works of David Simchi-Levi, Chopra and Meindl. We show in Figure 3 generic strategies of competitiveness of a company.

supply chain theory

Figure 3. The general model of competitive business strategy

According to the model, companies will seek to obtain a competitive advantage in business using one or more strategic options. Notably, the companies Best in Class (BIC) have developed strategies for competitiveness able to use two of these options and sometimes, but rarely, all three options. This effort has strategic sense because a company can adopt different strategies for different business units or different products depending on the current position in the market, its capabilities, available resources and skills acquired by enabling the implementation of the strategy to expand the market.

For a clearer understanding of the three generic options for developing the competitive strategy of a company we made a practical approach of the above mentioned options in Figure 3.

1.The first generic strategy related to the development of competitive companies is called “Cost Leadership” or “Strategy based on efficiency“. This strategy focuses on reducing costs and allows the company or the SC a profitable expansion of market share through an offer of products and services at lower prices than competitors.

We take as an example the strategy of cost reduction “Every day low prices” developed by WAL-MART, an American multinational company, the largest international retailer and one of the most valuable companies (the 3rd public company in the world).

How WAL-MART has managed to have the leading retail market cost?

a) Advanced Application of the principles of “scale economy” allowed obtaining lower prices for the purchase of products (very large discounts obtained through centralized purchasing of large volumes of products or services). Wal-Mart has about 10.130 stores and continues to expand their market share through a series of openings of new stores, entering new markets, acquisitions of small retail companies, expanding the online sales channels, developing new, innovative formats in Wal-Mart’s own brand.

b) Develop partnerships with suppliers through the application of VMI.

Used in partnerships with key suppliers, VMI (Vendor Managed Inventory) has become today a “best practice”, that was applied for the first time in the world of big retailers by Wal-Mart in his relationship with major suppliers. Recent studies show the extension of this concept to other industries such as chemical industry, construction, electronics, IT and communications.

VMI technique applies to high moving products and which have a very high proportion of sales volume in both the supplier and the buyer purchases. VMI techniques concerned are very important and valuable to business development of both partners, vendor and buyer.

What is this technique? The supplier assumes responsibility for the management of the buyer’s inventory based on the buyer’s information concerning access to the inventory level and sales. In the next articles we will make a detailed presentation on the implementation of this technique, the way in which payments are made, the moment of transferring the right of ownership of the goods sold, the partners responsibilities relative to commodity stocks in the event of excess or stock-out, etc.

The main advantages obtained from Wal-Mart’s strategy of cost reduction through application of VMI in relationships with major suppliers:

  • Elimination of costs on the supply orders, payment transactions, etc.
  • Reduce transportation costs through the consolidation of small shipments.
  • Reduction in the level of stocks and thus the expense of storage, a result of reducing bullwhip effect in SC occurs due to the lack of real information relating to the stocks and demand.
  • Avoiding the cost of risk on the interruption of deliveries by the supplier.

c) Making investments in information systems oriented toward efficient management of the SC.

Wal-Mart get significant discounts operational costs through its strategy in IT, like this:

  1. The use of “data mining” in data analysis in order to understand the behavior of buyers and their requirements,
  2. Integral Monitoring of SC processes by expanding RFID technology (radio frequency identification).
  3. Implementation of the operations of the Cross-docking distribution policies, where the products arriving at the depot in trucks are unloaded in the reception area and loaded immediately for delivery trucks waiting in the dock of expedition, without storing goods in the storage area.
  4. Stock Reduction, the costs associated with the handling and storage of excess safety stock through replenishment and reduction of the bullwhip effect.
  5. The effective management of one’s own transport fleet by applying the principles of consolidation of goods and the economy of scale.

d) Expanding the range of products

For attracting a larger number of customers in stores, Wal-Mart is offering in the world of retailers the widest range of products for sale.

e) Quick expansion of online selling channel.

Having the status of the largest offline retailer, Wal-Mart has huge opportunities to increase sales by expanding its presence in online commerce.

In conclusion: a declarative cost strategy is not enough. It needs to be supported both by Best Practice techniques and other functional strategies aligned to the common objectives of the company.

Next: Second part: Generic Supply Chain strategies for competitive businesses


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