Everything about Commodity Chains Framework - Term Paper Example

by Abstract There are two distinct theories in supply chain management, the commodities chain approach and the sector matrix approach. Commodities chains are conventional one where sector matrix is a modern and holistic concept. The essay specifically discusses the sector matrix and how it offers a better strategic understanding of product markets than the ‘concept of product chain’ Introduction: Supply chain management deals with the flow of goods. Starting from collection of raw materials for work in progress, to storage of finished goods and finally sending it to the point of sales. All these steps are interconnected or chained. If any problem arises in any stage, all the system gets disturbed. Some strategic management concepts have to be used where large scale production is taking place. For instance, China is a country where strategic supply chain is vastly used. Sector matrix, product chain and commodity chain are the sub-topics of supply chain management. To compare these three concepts, the study is taking help from Julie Fourd’s Sector Matrix, Porter’s Value chain and Global Commodities Chain framework by Korzeniewicz. The study will try to find out,which strategy is better among all the three theories or gives better strategic understanding of the product market. Commodity chain and value theories are old and conventional approaches to analyse the business, whereas sector matrix analysis is comparatively modern and wider approach. To analyse the scenario, the study takes examples from the automobile market, because the system of supply chain is complex in the automobile sector. Global Commodity Chain: Through commodity chain, a firm gathers resources, changes them into goods or commodities, and ultimately allocates those items to customers. Gereffi and Korzeniewicz (1994) argued that the Global Commodity chain (GCC) dealt with inter-organisational network regarding any particular commodity or service. Immanuel Wallerstein and Terence Hopkins (1982) developed the concept of Global Commodity Chain. Commodity chains have economic, environmental, political and social implications on the system. If any organisation is working in a big way, in most cases, it has its chains present across the globe. Commodity chains are available in two types. First one is producer driven and second one is buyer driven. Figure 1: Buyer and producer driven market Source: The Geography of Transport System Hopkins and Wallerste (1986) argued that commodity is the end result of production process and a series of labours. Labour intensive commodities such as consumer electronics, footwear and toys are examples of buyer driven market. These are basically retailers and branded marketers and works under decentralised factory units. On the other hand, producer driven units are large manufacturing units and these are fundamentally technology intensive. Computers, automobiles and aircrafts fall under these categories. Basically there are four steps. The first simple stem is to organise input output framework to make the product at factories. Second, to keep track of the various geographical locations, third to adjust with some outside factors such as environmental and social implication; fourth, the influence of other institutions such as government policy. Value Chain The global commodity chain model has many similarities with Porter’s Value Chain Model. To a certain extent, it is a developed version of value chain. Business organisations practice generic strategy to get the competitive advantage. Porter (1985) argued that every organisation or firm is an association of different kind of activities. The main activities are designing the product, producing it, bringing it to the market and finally delivering and supporting its products. The researcher divided the work in two segments -- primary activities and second activities. Primary activity focuses on the physical creation of the product whereas the secondary activity helps to roll the supply chain. Primary activities include inbound logistics, procurement processes, outbound logistics, marketing networks and services. The support activities include technological development, firm’s infrastructure, procurement and human resource management. All of these have an impact on the cost structure of the business entity and helps to achieve competitive advantage. Sometimes it is alleged that the value adding steps are overlapped in the Value Chain Model. About commodity chain analysis, Paul (2009) segregated the entire commodity chain into some levels. These are as follows: Transactional Perspective: It focuses on the management part and the decision making process of the chain. This is management of transactions. Comparative Perspective: It is used to get the comparative advantage by rendering efficient linkages among each and every stage. It also deals with the quality parts of the manufactured product in the chain. Functional Perspective: It focuses on the functional part of the product through which the product undergoes in a distributional channel. It includes the stages of distribution constraint Commodity Chain analysis has some limitations as well. According to Von Molteke et al. (1998), in the approach, the basic need is clear and exhaustive data. There are many factors in a business model which cannot be perfectly quantified. For instance, effective quantification of political, social or environmental impact is difficult. Even if one can quantify economic influence, it is very tough to quantify effectively the political influence. On the other hand, one cannot overlook these factors because these factors have a strong network relationship with supply chain management. William Rees and Mathis Wackernagel (1990) introduced the concept of ecological footprint to translate the resource utilisation into quantitative estimates. It was supposed to provide the comparison of resource demand. Case Study-1: There are cases where product driven chains are used in automobile sector. According to Hill (1998), the automobile sector in1980’s in Japan had 170 first tiers, 4700 second tiers and 31600 third tiers. Kennedy and Florida (1991) admitted that the Japanese auto sector used North American Supply Chain Network. Doner (1991) highlighted the recognition of Producer Driven Commodity Chain in East Asia after the globalisation of United States. Sector Analysis Like other theories, Chain Analysis has limitations as well. The chain system was better applied in a simple system such as food retailers. Here, once the product is distributed, no further infrastructure is needed. But where the system is complex and huge, infrastructure is required. For example, for sectors such as pharmaceutical companies or vehicle manufacturing units, the commodity chain system is not that useful. As the concept of sector matrix is a developed version of value chain and commodity chain, it can be applied in complex systems. Julie Foud, (1998), Karel W, and Sukhadev, J introduced the idea of sector matrix as an alternative to GCC in the automobile sector. The sector matrix takes into account the manufactured products and supply channels. Gerrefi (1996) highlighted that it was tough to classify an organisation that produces rear window for vehicles as a completely distinguished industry or a subchapter of the automobile sector. Sector Matrix Analysis from the Demand Side The demand from households and firms outside from the particular sector are reflected in the sector matrix analysis. This approach is governed by these demand estimates and it helps to generate profit, restrict loss and cost recovery. If any surplus gets generated in the process, it gets deposited in the other chapters in national and international level. While analysing, it considers not only the particular commodity but also the substitutable finished goods, complementary items as a part of the analysis. It basically gives a more holistic view unlike commodity chain. It provides vertical and horizontal matrix including economic condition, income and demand forecast, rather than just a chain. As the automobile is a complex model it requires an approach which has a better and holistic view. So this theory is applicable for the automobile sector. Automobile sector is identified as the background of analysis of Sector matrix because of its forward and backward business nature while analysing sector matrix it can be seen that the demand of automobile went down during 2007-2009 are it was a recession hit economy that time. As the overall income of the households was not good, the purchasing power of the targeted consumer was not in a good shape. The sector matrix analysis was used to forecast demand. The demand of automobile depends on disposable income. After understanding this the automobile company Sector Matrix from Supply Side Sector matrix is a helpful instrument to understand the industry perspective. Generally car is an assembled product item. It has a strong connection with other industry such as steel, tyre and glass. To supply vehicles it has to depend upon the supply of other units. As the cost of these items varies of these commodities, the cost structure of automobile company also changes. If one of the components is suffering from financial problem the entire supply chain gets affected. Case Study-2: After reviewing the aspects with the help of sector matrix approach, the automobile company Ford determined the demand level and made a appropriate pricing for it. Ford holds the second position in the automobile market of United States and fifth position globally in terms of vehicles sales. In 2010, it made its position in Fortune 500 list. In 2009, during the global downturn Ford incurred a drop in sales by 23.4%. The entire European and American market faced saturation in auto sector. The revenue collection in 2009 was 118.3 billion. None of the automobile company was financially well off those days. The situation was so bad that possibility of bankruptcy was arose in Ford. That time big automobile companies like Chrysler and General Motors actually had to file bankruptcy. Then the company introduced a change in management and the company started performing better. The new leaders took new strategies and launched economic, low price trendy cars. The company’s 16 factories were stopped. It also changed the brand positioning. It turned the economic crisis an opportunity and re-positions its brand. It focused women driven car market and providing service quality. It has Ford Fusion for women. Then the company did well. Previously, also from 19910to 2001 ford suffered from growth problem and with the help of sector matrix it was successful to combat the challenges. Jacques Nasser, the former CEO of Ford admitted that, the organisation had to be more focused towards the consumer. Due to this the change in focus the vision of the company will also change. Ford would be leading consumer company of the world which provides automotive services and products not merely the number one automobile organisation. In order to fulfil that Ford broadened its subsidiary and bought car servicing company Kwik. It already had Hertz, a car rental company, Ford credit a financial service company. Discussion In other areas researchers like Froud et al. admitted that in many business areas such as trainers and shirts, it is not advisable to considers these as sectors or rework as sectors because the infrastructure and the business process are very simple. Here the commodity chain approach or the product chain approach is more suitable. But in case of complex industries where the demand function is unpredictable the sector matrix approach is applicable. Conclusion Sector Matrix approach is a significant instrument in today’s’ business scenario. It gives the vivid glance of the complex business environment. Where the conventional technique such as global commodity chain approach has limitations to give a clear picture, the sector matrix approach has a vital role to play. As the sector matrix takes into account many wider factors such as economic, social political and environmental aspects the theory can give a wider picture compared to others. This approach can be correctly used for demand and supply analysis and forecast. The theory considers vital facts such as economic situation, current production, supplementary and complementary goods, employment, disposable income, growth, overall domestic and global market condition, cost structure of the company, competitors, government policies etc. As the sector matrix considers demand forecast from household and firms outside the sector, it can take a better and holistic view about the product. A wider perspective gives more correct prediction and better result. It is clear that sector matrix gives a better strategic understanding compared to other approach. Finally it can be concluded that when the business structure is simple and the requirement for infrastructure is less, such as food retailer, then product or commodities chain analysis is appropriate. When the business process is complex and the requirement for infrastructure is huge, such as in pharmaceutical and automobile sector, then sector matrix analysis is a better option. References Dicken, P. (1998). Global shift: Transforming the world economy, 3rd edition. New York: Guilford Press. Doner, R. F. (1991). The Industrialization of the Automobile firms in Japan and Southeast Asia. Berkeley, CA: University of California Press. Gereffi, G. (1999) ‘A Commodity Chains Framework for Analyzing Global Industries’  Julie, F.  et al (1998). Breaking the Chains? A Sector Matrix for Motoring, Vol 3. Overseas Publishers Association. 1998. Hopkins, T. et. al. (1986) ‘Commodity Chains in the World-Economy Prior to 1800’ Review 10, Vol. 1: pp. 157-170.  Von Moltke, Konrad and Onno Kuik (1998). Global Product Chains and the Environment, Institute for Environment Studies, Amsterdam. Marion Werner and Jennifer Bair Losing our Chains: Rethinking Commodities through Disarticulations, available at http://meridian.aag.org/callforpapers/program/SessionDetail.cfm?SessionID=5124, accessed on March 16, 2014 Porter, M. (1985) ‘Competitive Advantage,’ New York: Free Press  Visteon (2008) ‘Spin-off Information’  Available at: http://phx.corporate-ir.net/phoenix.zhtml?c=122447&p=irol-spinoff (Accessed March 16, 2014)  Wilson, A. (2006) ‘Ford Overhauls Way Forward Plan’ (AutoWeek)  Available at: http://autoweek.com/apps/pbcs.dll/article?AID=/20060915/FREE/60915001/1024/LATESTNEWS (Accessed March16, 2014) Read More