HP Usage of Logistic Systems and Their European Supply Chain - Case Study Example

Executive summary For a company to attain and maintain its competitive position in the current competitive market, it requires that it develops and uses effective logistic systems. The company should also form a good SC for it to be able to strategize and optimize its market operations. The establishment of Single European Market (SEM) in 1992 has changed the business environment and presented various impacts. These have affected the businesses and operations of many companies. This paper gives a literature review on logistic systems and SC, and their management. Also included are business models and SEM. The paper also provides a case study of HP Company in relation to their logistic systems, SC, effects of SEM on its SC, future management trends and how the company can apply the various business models to analyze and improve its operations. Logistic Systems and Supply Chain (SC) Chapter 1: Literature Review of Supply Chain Management (SCM) and logistics Supply chain (SC) Supply chain may generally be defined as a system of organizations, resources, information, people, technology, and activities that are involved in transferring a service or product from the supplier to customer. The activities of a supply chain transform components, raw materials and resources into a finished product to be delivered to the final consumer. A typical supply chain starts with biological and ecological control of natural resources. This is followed by the extraction of raw materials by man. It also includes various production links like merging, component construction and assembly, before proceeding to several layers of storage facilities which are of ever-diminishing size. The storage facilities also become increasingly more remote in their geographical locations. Finally, the product reaches the consumer (Chen and Paulraj 2004). Push and pull of supply chain In a supply chain, push and pull refers to the movement of information or product between two subjects. This means that one of the subjects pulls the product or information while the other pushes it to the one who needs it. The practical situation in the markets is that the consumers ‘pull’ the information or goods they need while the producers or suppliers ‘push’ the needed information or goods to the consumers. In supply or logistic chains, these stages usually operate in a push-and-pull manner. This leads to push production which is based on expected demand, and pull production determined by consumed/actual demand (Harrison et al 2003). Distribution channels and benefits of the supply chain According to Barrat (2004), distribution channels refers to the paths via which services and/or goods flow from the vendor to the consumer and the payments generated flow from the consumer to the vendor (in the opposite direction). Its length varies for example it could a direct contact between the vendor and consumer or it could include various interconnected intermediaries which are independent but mutually dependent. Examples include agents, distributors, wholesalers and retailers. Each of the suppliers receive the product at one pricing point and passes it to the next pricing point till it finally reaches the final buyer. It is also called marketing channel or the channel of distribution. Having a supply chain enables a business to be a low cost provider. It also enables the business to attain a higher competitive position by having many suppliers of varied levels spread across various geographical regions. This ensures that their products cover a wider area of the market and easily reach the final consumers. The supply chain is also the best channel to get information concerning substitutes, new entrants and competitors. This will enable the company strategize well to overcome mitigate every threat and maximise its strengths. Logistics In business, the term logistics refers to the management of the flow of services and goods between the production point and the consumption point so as to meet consumer requirements. The consumer requirements are therefore met through time-related positioning of resources. It involves the integration of information, inventory, material handling, transportation, warehousing, packaging and at times security. Basically, logistics is a channel of the SC which adds the value of place utility and time (Oliver and Webber 1982). Logistics and the supply chain management (SCM) Logistics management refers to the section of the supply chain which plans, controls and implements the efficient and effective flow and storage of services, goods and relevant information between the production point and consumption point, in order to meet legal and consumer requirements. It is also called channel management. It provides a practical management perspective in sales and operations planning, order fulfilment, importing/exporting, transportation, and managing people and changes within the SC (Porter 1985).On the other hand, SCM refers to the management of interconnected businesses that take part in the provision of service and/or product packages that are needed by the final customers (Chen and Paulraj 2004). In other words, the business organizations form a network. SCM spans all work-in-process inventory, transportation and storage of raw materials, and finished goods from the production point to the point of consumption. In summary, SCM can therefore be defined as the planning, design, control, execution and monitoring of the activities of a supply chain with the objective of building a competitive structure, creating net value, matching demand with supply, leveraging worldwide logistics and measuring global performance. The main objective of SCM is to satisfy customer demands. This is achieved through the most effective use of resources including labour, inventory and distribution capacity (Paul and Donnelly 2002). Theoretically, a supply chain usually endeavours to match demand with supply using the most minimal inventory. Some of the strategies that can be employed to optimize a chain supply are, maintaining the correct mix and location of industries and warehouses to deliver to customer markets, implementing just in time (JIT) techniques to maximize manufacturing fallow, and making strategic sourcing so as to achieve a balance between transportation and the lowest material cost. These strategies also include elimination of bottlenecks by liaising with suppliers, analyzing vehicle routing and using a dynamic programming for the various operations of the company (Chen and Paulraj 2004). Chapter 3: Literature Review of EU SC concept, Single European Market (SEM) SEM and its impacts Brown (1993) defines the Single European Market (SEM) as a single economy area in the EU which is not bound by national barriers to trade. Basically, it is a free trade area operating under a common external tariff. In the SEM, there is a free flow of capital, labour, services and goods. The SEM was established from 1992 with the aim of reducing costs of trade, intensifying competition in the economy of the European community (EC) as well as improving its economic efficiency. The establishment of SEM has altered the business environment. Since its establishment, the SEM has led to increasing cross-border shopping and intra EU trade, and increased frontier mergers and acquisitions (M&A). For example, in 1993 EU recorded a 29% intra-EU share of global M&A activity. This was an increase compared to 10% recorded in the 1985-87 period (Jansson et al 1994). SEM has also resulted to increased competition hence reduced product prices. This translates to reduced profit margins for companies. There has been a continuous reduction in the price-cost mark-ups in manufacturing industries in the EU at a rate of 0.2% annually. The impacts of SEM are greatest in financial services, utilities, food processing, aerospace and pharmaceutical sectors Benefits of SEM The report released by the Cecchini/Emerson commission in 2003 indicates that by 2002, there were about 2.5 million extra jobs and increased EU-GDP. In 2002 alone, there was a 20% rise in EU-GDP due to SEM. In addition to this, the level of exports in third world countries had also increased. Expressed as percentage of the GDP, the FDI-flows have more than doubled as a result of the establishment of SEM. The general benefits of SEM to the EU citizens include increased prosperity, availability of a wider choice of products in the market, huge potential markets, less red tape, additional jobs and more opportunities to live, work and study abroad. Due to increased competition within member nations, consumers are able to benefit from lowered prices. There is ease of travelling and shopping and welfare gains to the people due to free labour movement. Effects of the SEM on Supply Chain SEM has encouraged the expansion of SCs because it has enabled a seamless movement of goods across boundaries and creation of huge markets. In this case, the SCs are able to expand their networks to cover cross-border regions. SEM has resulted to increased efficiency in the existing cross-border SC distributors due to the removal of border controls. SC logistics have become more efficient due the elimination of custom delays which used to cause unrealistic transit times. It has also allowed them to operate at low costs because transaction costs have been eliminated and there is more price transparency (Jansson et al 1994. Chapter 2: Business Models- Literature Review Three business analysis tools can be used to assess the activities of a supply chain. These are porters five forces, SWOT analysis and Porter’s value chain model. Porter’s value chain model The Porters value chain model of business analysis allows a company/business to analyze particular activities through which it can create a competetative advantage. First of all, the business has to start with the generic value chain then proceed to identify specific activities which are relevant to the firm. The business can develop a map of the process flows then use the flows to isolate the various value-creating activities. After defining discrete activities, the company should identify the links between them. In this case a link will only exist if the cost or performance of one activity affects the other. The linkage activities are optimized and coordinated to obtain a competitive advantage. Activities in the Porter’s value chain are divided into primary and support activities (Porter 1985). Primary activities The primary activities in the value chain are inbound logistics, operations, outbound logistics, marketing and sales and finally service. Their goal is to create value that is above the cost of providing service or products hence generating a profit margin. They are important in the development of a competitive advantage. They are generic and include activities peculiar to different industries. In this model, inbound logistics include receiving, inventory control of input and warehousing. According to Paul and Donnelly (2002), operations refer to value-creating activities which change inputs to final product. The outbound logistics include activities needed to get the finished product to the consumer. Marketing and sales refers to activities related to getting buyers to buy the product, pricing, advertising and channel selection. Finally, services refer to those activities which enhance and maintain the product’s value. These include repair services and customer support. Support activities. In a SC, support activities are procurement, technological development, human resource management and firm infrastructure. Their function is to facilitate the primary activities in order to attain company goals. Procurement is the purchase of inputs, mainly raw materials, to be used in value-creating activities. Technology development involves process automation, research and development which can be used to support the value chain activities. Firm infrastructure includes activities for example quality, legal and finance management whereas human resource management refers to activities pertaining to hiring/recruiting, development, and compensation of workers. Porter’s 5 forces Porter (2008) says that Porter’s 5 forces model is composed of five competitive forces. These are threat of substitutes, bargaining power of customers, bargaining power of suppliers, threat of new entrants and competitive rivalry between current players. If the five forces are low, it shows that the business is more attractive and in a good position to make profits but if they are high, the business is less profitable and hence less attractive. From the analysis of these five forces, a business will be able to know the level of its overall cost advantage and the level of its service or product differentiation from that of its competitors. This could be in terms of brand image or product characteristic. Using this information, the company can restructure its logistic and SC operations and regions so as to secure a better competitive position. Rivalry usually threatens to bring the profits of a company down to zero. It is indicated by industry concentration which impacts on the market share of the competing companies. However, competition is not perfect and hence companies have a change of fighting to secure or stabilize their competitive positions. Factors which influence rivalry include low switching costs, low levels of product differentiation, high exit barriers, slow market growth, high fixed costs and an increase in the number of firms. A threat of substitutes emerges when the demand of a product is affected by changes in the price of substitute products produced by other industries. Though they are not direct competitors, they create demand elasticity which also influences the price elasticity of a product. Closer substitutes restrict the ability of firms to increase their prices. If the power of buyers is too high, it means the companies have to comply with the prices set by the buyers. This is because of the many suppliers verses one or few buyers or that there is a high possibility of the buyer switching to a rival brand. It is also encouraged by low switching costs (Porter 2008). A buyer-supplier relationship is established between a company and a raw material supplier because it requires components, labour and other supplies. If the supplier becomes powerful, they can impact on the company for example supplying raw materials at a higher cost so as to capture its profits. This happens if there are few suppliers, high cost of switching and strong customers. New entrants in the market without doubt raise the market’s competitive level. This usually comes about when the profits of a company increases hence new entrants come in with an aim of sharing in the high profit margins. This requires that companies should features that will protect their high profit margins and inhibit the entry of rivals. This model enables a business to get an understanding of the sector it is operating in. SWOT analysis SWOT analysis is an important tool in strategic formulation and management because it reveals the strengths, opportunities, weaknesses and opportunities of a company. It enables information to be captured and be clearly communicated so that the firm can develop strategies that take into consideration the various decision factors and inputs. These include information pertaining to a business, its SC and give their positions and effectiveness at a particular time. The strengths are those internal factors which create value whereas weaknesses are those that destroy value. Strengths and weaknesses include resources, skill and assets owned by accompany as compared to its competitors. These two are usually under the control of the organization. Opportunities are those external factors which create value whereas threats are those that destroy value. They are usually beyond the control of the company. After obtaining its SWOT, a company then focuses on factors that drive its business in terms of impact not trend then capitalize on them. A consideration of the SWOT will enable a company determine its future strategies and even change it business model (Paul and Donnelly 2002). Chapter 4: Case Study HP’s use of logistic systems and the European supply chain History and background HP (Hewlett-Packard) company is an American multinational IT corporation. Its headquarters is Palo Alto, California in the US. The company was founded in 1939 by David Packard and Bill Hewlett in a one-car garage. The company has since then grown into one of the largest IT companies in the world operating in almost all countries. It specializes in networking hardware, data storage, developing and manufacturing computing and designing software. Its major product lines are printers and other imaging products, networking products, personal computing devices among others. Its marketing procedures entails direct sale to small- to medium-sized enterprises and businesses, households, major technology vendors, office-supply retailers, online distribution and consumer electronics. In 2007, the company was awarded for corporate sustainability. Effects of SEM on the supply chain of HP. Before 1993, HP did not have such a complex and long SC in Europe. However, its SC has then expanded greatly between 1993 and 2011 due to the establishment of SEM. This is because SEM has created a favourable business environment. For example, HP Company, in conjunction with its partner, the Copenhagen Centre for Corporate Responsibility, has built the capacity of its suppliers in Europe. Generally, SEM has enabled HP to have the most complex and largest SC in the IT sector. This situation has enabled the company to drive change through its SC. Porter value chain HP should improve its efficiency inbound logistics, operations, outbound activities, services and technology. This will enable the company to create more value for its products and hence attain a higher competitive position. It will also enable the company to align its production with the demands of its customers. Under the guide of this model, the HP Company should be able to ensure that all its activities add value to the product or service produced. The company should also ensure that these activities run at optimum level so that the company can gain a competitive advantage. The management should see to it that support services are operating properly that they can assist the primary activities in obtaining a good competitive advantage for the company. Application of Porter’s 5 forces on HP logistical system and supply chain The management of the HP Company should be able to critically analyze the present and potential future state of the 5 competitive forces as described in the porters 5 forces model. These are threat of substitutes, bargaining power of customers, bargaining power of suppliers, threat of new entrants and competitive rivalry between current players. Using the information obtained, the managers should be able to come up with strategies of influencing these forces in order to favour the interests of the company. These strategies should be able to influence the impact of competitive forces on the company (Porter 2008). Specifically, the strategies employed should aim at diminishing the power of competitive forces. For example, in order to reduce the bargaining power of rival suppliers, the company should conduct SC training, improve its SCM and increase their knowledge of supplier costs and methods. In order to reduce the bargaining power of their customers, the HP management should increase customer loyalty, reduce the number of powerful intermediaries in its SC, improve its SCM and form partnership with similar companies. They should also distance purchase decision from price, increase value added and incentives. For the HP Company to diminish the threat of new entrants, the management should tie up with suppliers and distributors, form alliance with linked products and create a better brand image. It should also protect its intellectual property and improve on their lowest efficiency scales of operation. After understanding the level of existing competitive rivalry between the present players, the HP management should differentiate their product, avoid price competition and reduce industry over-capacity. These will help to reduce the competitive rivalry between the company and its rivals. The threat of substitutes should not be ignored. The company management should conduct needs analysis and general customer surveys in order to know their preferences. They should also increase switching costs to discourage customers from switching to substitutes. When combined with the PEST-Analysis, this model becomes useful in revealing the potential future attractiveness of the company. After applying appropriate strategies to counter the five forces, the HP Company will be able to improve their competitive advantage (Porter 2008) SWOT analysis as it applies to HP logistical system and supply chain Harrison et al (2003) argue that SWOT analysis can be used by the HP management to analyze the validity of its business objectives, logistic systems and strategic options for example SC. The managers of the company can also use the information from SWOT analysis to assess the advantages and disadvantages of the strategies they apply in their business operations for example, the structure or length of its SC and their logistics. First, the management should be able to identify the strengths of its logistic systems and SC. These include effectiveness of its management systems, reputation, time and human resource management, responsiveness of its technologies, quality of staff, competitor activities among others. Secondly, the HP Company needs to identify its strengths and weaknesses. Besides strengths and opportunities, a company also needs to identify external factors included under opportunities and threats that need to be addressed. After carrying out a SWOT analysis on its logistic systems and SC, the HP management will be able to formulate and adopt strategies that will enable them to use and capitalize on each of the identified strength and improve on identified weaknesses. The strategies should also enable the company exploit identified opportunities while mitigating on identified threats. The final step in a SWOT analysis is a carrying out a ‘Matching and Converting’ exercise. This includes matching the company’s logistic systems and SC aims in order to find competitive advantages. They should also the match company’s strengths and opportunities then capitalize on them. At the conversion stage, the HP company management should apply strategies that will turn/convert weaknesses and/or threats into opportunities and/or strengths. If the identified weaknesses or threats are inconvertible, the HP management should seek for ways to minimize or avoid them (Harrison et al 2003). Chapter 5: Future Trends in SCM and Logistics System in HP Environmental issues HP is committed to environmental risk management because it recognizes the great impact of its products on the environment. The company is therefore committed to providing them in an environmentally friendly and responsible way. One way of achieving this is producing mobile devices, printers and flat panel monitors that using lesser amounts of material yet meeting consumer needs. Their designs are sympathetic, and require less transport and packaging. Their recommended disposal methods are aligned to environmental expectations. HP is currently among the top companies whose products emit low amount of greenhouse gases (GHGs) and the trend is yet to improve even as their innovation advances into production of more smaller efficient products (Newsweek 2009) IT supply chain In its future, Enterprise Resource Planning (ERP), the HP Company needs to develop a single software solution that will be able to integrate all the functions and participants in the Sc of its IT. This will allow for ideas and decision making to be shared among the various parties in the IT SC. This will also allow that action taken by some parties in the SC will be able to be followed by the others and appropriate action taken. ERP software can be applied in customer ordering and delivery. The ERP software will also ensure that customer order transits smoothly from sales to inventory, to manufacturing to appropriate suppliers then finally to customer. The software will also enable the SC to have a direct relation with the other wings of the company. Having single software for all operations will cut down power consumption and lead to efficient data management (Paul and Donnelly 2002). The current clamant and its impact on SCM Currently, there is global increased in the need for IT products. This is because most companies and corporate bodies are now turning to modern technologies in order to attain a competetative advantage globally. Individuals on the other hand are turning to increased use of mobile devices and acquisition of technological assets like printers and other imaging systems for personal use or business purposes. This has impacted positively on the SC of HP. It has enabled the company to expand its SC in order to reach out to the expanded highly-demanding market. The expanded SC also enables the company to maintain its competitive position even as competition tightens. Chapter 6: Conclusion and recommendations HP has achieved a good global sustainability because of effective logistics system, and an adequate and efficient SC. The company products carry a global citizenship due to its operations worldwide hence it has a good competitive position. The company should however conduct more education to its suppliers to improve the effectiveness of its SC. The company should also improve its product image due to increasing global competition. It should also improve the friendliness of its products to the environment so as to be enlisted as environmentally friendly brands. This will expand its market among the environmental conservers and enjoy their unpaid yet impacting product advertisement services. References Barrat, M. (2004). “Understanding the meaning of collaboration in the supply chain.” Supply Chain Management: An International Journal. (1) pp 30-42. Brown, M. (1993). Logistics Strategies in the Single European Market and their Spatial Consequences. Journal of Transport Geography. (2) pp 75-85 Chen, J. and Paulraj, A. (2004). “Towards a theory of supply chain management: the constructs and measurements.” Journal of Operations Management. (2). Pp 119-150. Harrison, T. Lee, H. and Neale, J. (2003). The Practice of Supply Chain Management. Springer. New York. Jansson, K. Kirk-Smith, Wightman, S. (1994) "The Impact of the Single European Market on Cross Border Mergers in the UK Manufacturing Industry", European Business Review. (2) pp8-11 Newsweek (Sept 22, 2009). HP, Dell, J&J, Intel and IBM Top Newsweek’s Inaugural Green Rankings. Newsweek. London. Oliver, K. and Webber, D. (1982). “Supply-chain management: logistics catches up with strategy”, Outlook, Booz, Allen and Hamilton Inc. 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