Supply Chain Management and Marketing Strategy - Essay Example

SUPPLY CHAIN MANAGEMENT A STUDY OF ITS WIDE SCOPE TABLE OF CONTENTS Page 3 2 Introduction 4 3 Importance of Purchase in SCM 4 3.1 Benchmarking 5 3.2 Purchasing Complexities 7 4 The Supply Chain 8 4.1 Origin of 3rd Party Logistics 10 4.2 Strategic Planning 12 5 Marketing Strategies 12 5.1 Fulfillment Factories 13 6 Extension of SCM to Retail 16 7 Technology 17 8 Conclusions 18 9 Bibliography 19 1 Abstract Modern Supply Chain Management (SCM) has increased in scope to include all activities covering Purchase, Inventory Management, Production, Distribution, Logistic Support, Retail and the Consumer. The objective is to reduce the order-to-supply cycle. These activities are often carried out by several organizations including divisions of large companies, working in tandem to serve the consumer. It calls for close collaborative effort and has to be backed by technology to ensure smooth flow of information at each stage. The global scene today calls for competitive advantages of a different kind and marketing strategies have evolved around the SCM systems in order to achieve both cost advantage as well as superior service advantage. The essay has captured all these aspects in detail and concluded that SCM today is most successful when blended with marketing strategies. 2 Introduction The life of a product encompasses its conception, procurement of components or raw materials, production, storage and finally sale to the ultimate consumer. This apparently simplistic process is involved in a cobweb of activities that are inter-related and inter-dependant. It also means immaculate and detailed planning for cost effectiveness and competitive advantage. Various strategies have to be formulated, communicated and implemented in order to be successful in the market. Purchase plays a pivotal role and indeed a good purchase ensures profitability of the product. But purchase is not a stand alone activity rather it is process that begins with organizing a long and steady supply chain. This extended supply chain that begins with purchase ends with deliveries to the final consumer in furtherance of marketing strategies. 3 Importance of Purchase in Supply Chain Management (SCM) Purchase is the foundation of making an effective Supply Chain. A good purchase will often result in better margins. Organizations have specialist purchase departments. They are informed of the requirements and in turn they organize purchases according to previously laid down policies of the organization or company. Larger organization may have more than one purchasers or even a group of people making purchase decisions. Since there are individuals who finally make decisions their judgment, whether individually or in groups, are influenced by the environment they work in. Kohli (1989) proposed that influence is a function of personal resources or power. Every person has a demographic background that largely consists of his personal resources comprising mainly of ethics and education. His decision is influence by these. The status hierarchy determines the level of power but that can be moderated by the influence of the size, similarity and cohesiveness of the group he works in and the risk, time and pressure of the situation. These factors when combined influence behaviour in purchase decisions. These are decisions that can actually reduce the cost of purchase as well ensure quality and time bound deliveries. This adds value to the organizational purchases. Sheth (1973) maintains that the psychological world of the decision makers affects purchasing behaviour. This will include the special knowledge the purchaser has acquired, the training he has received, the skills he has developed and the seller networking he commands. This expertise together with the stake he has in the decision finally leads to efficiency in placing Purchase Orders. With higher level of these factors the purchaser is able to make best possible purchase decisions which result in cost effectiveness for the company. Cost is not solely determined by price alone, and is a result of deliberation and consideration of quality, delivery schedules and quality of service. All of them are critical characteristics (Robinson, P. et al) and a purchase decision that has taken all these factors into consideration will result in the best cost of purchase and this will in turn affect the selling price of the manufactured or finished product and add to the profitability of the organization. 3.1 Benchmarking Benchmarking is the tool that is used to advance the practice of purchasing from ordinary to exceptional. It can be used to set targets that are required to be ultimately achieved by the purchaser. It can be utilized to assess the company’s strength or weakness in the purchase process vis-à-vis the suppliers and competitors. These actions finally bring about Best Practices. Best Practices evolve over a period of experimentation and result in setting parameters of quality and terms.. In the past ten years, benchmarking has become a common practice in purchasing departments (Carr and Smeltzer, 1999). This has helped in getting better products at better prices and on better terms. Therefore Benchmarking has made a positive impact on the purchasing function and has improved performance. A high performance level of purchasing functions results in high levels of business performance. Bench marking also became necessary because business expanded to other geographies and often with diverse suppliers. It would be difficult to place order for the same item which was perceived differently by different suppliers. There had to be a standard fixed by the purchaser that was understood equally by all suppliers to ensure uniformity of quality standards. The evolution of benchmarking ensured that when suppliers understood the exact requirement, minimum communication was needed and automatically deliveries were received without delays. This in turn ensured that Production could be fed in time. A side effect was that inventories could now be controlled better and more efficiently. Fortunately technology saved the day and with introduction of automation and dedicated software a quantum jump was made into making purchasing a more organized and efficient function. The concept of quality and delivery schedules got more importance than price. It became possible to evaluate the performances of the various vendors against benchmarking and ABC analysis made them perform better if they wanted continued patronage from the Purchaser. The Purchaser too became accountable as his track record now became transparent and in turn his position became respectable in the company. With Globalization of business international procurement commenced and the concept of supply chains evolved. From a one sided piece meal order, purchasing was transformed to collaborative efforts between the Production department and the Supplier with the purchaser acting as the conduit and controller of events. Orders were made for prolonged periods and larger repeated quantities of standardized benchmarked products and delivery schedules were spaced according to the requirements of capacities. This collaboration between production, inventory, supplier, and the purchase department was the new beginning and was facilitated with introduction of sophisticated software and Supply Chain Management systems. 3.2 Purchasing Complexities As Purchasing moved to higher levels new complexities were introduced in the system this became a pivotal function for ultimate profitability of the manufactured product. David Farmer proposed four laws for the importance of Purchasing: Purchasing increases in perceived importance in direct relationship with the reduction in the length of the company’s product life cycle Purchasing is perceived as being important when the business concerned interfaces significantly with volatile markets Purchasing is perceived as being important when the business interfaces with demanding customers Purchasing is important whenever the organization concerned spends a significant proportion of its income on purchasing goods and services to allow it to do business. (Farmer, D. 1997) Purchase got itself elevated and redefined. With different organizations, both in the public and private domain, purchasing became a central point which would contribute to the various profit centers. The process of purchase was now divided into various types to fulfill diverse needs. Purchase became the first step towards organizing a supply chain. 4 The Supply Chain Multinational Companies have evolved the supply chain system and they prefer to source their requirements form the most suitable area for a particular product manufactured in a specific country. While the preference is to source from the local vendor for price and delivery benefits, there may be occasions where special items may have to be bought from a vendor in another country involving legal and financial concerns. In such cases having multiple purchase options is a possibility; thereby adding to the complexity of the whole transactions. Use of Supply Chain software is necessary in such cases to keep track of materials. Another important feature in Global operations is the emergence of partner programmes where the vendor becomes a part of the supply chain process and has contract to supply materials to several locations. In such cases there is more collaboration than ordering between the purchase department and the vendor and the traditional relationship converts to a partnership. Under modern Supply Chain Management (SCM) the supplier is linked directly to sales. Under this linkage he is aware of the movement of final products from the shelf and replenishment of supplies is triggered after reaching a certain predetermined level. This generates automatic orders on which he commences working without receiving formal orders. This saves time and ensures regular deliveries to production. However this requires careful planning and is applicable to regularly moving common items that do not require changes in form or content. This is applicable in order to make situations where products are rolled off from assembly lines continuously, like Coke. In cases where production planning is on made to order basis, the supplier is linked to production and their need or inventory level triggers the placement of order for the supplier to act upon. When organizations operate worldwide the Purchasing may be done either centrally or powers may be given to regional offices to procure requirements locally. Global purchasing involves understanding of different cultures and financial requirements. There are also different legal and regulatory requirements that are to be met. The Purchase department has to have a thorough knowledge of these as they will impact the price as well as the delivery times. Since most of these matters are technical in nature, the legal and finance departments are more actively involved in purchase decisions. Agreements have to be vetted by the legal division and all clauses have to be understood in depth. The exchange regulations, customs and duty involvement and other formalities like shipment modes and insurance coverage make the whole process rather complex. In companies that depend on a Global Supply Chain system an important factor is the Logistic Management. This means movement of goods, whether raw materials or finished goods must be continuously monitored through a tracking system to know exactly where the item is within the supply chain. This helps in controlling and managing roadblocks and assists crisis management. This ability is of paramount importance as it could effect supplied and actually stop production. 4.1 Origin of 3rd Party Logistics. In the 1980’s globalization spread worldwide forcing some companies to re-think their position in asset building for logistics. As the cost and expertise required was too much and the spread very wide there was a need for outsourcing these activities to specialists who could deliver the result at fixed costs and in an agreed time frame. Since these would leave the company free to concentrate on its core manufacturing and marketing activities, the idea was well received in the market. This gave impetus to companies like DHL and NYK logistics to develop the kind of expertise required for this work. They also had to arrange the assets like warehouses and owned transport to manage these logistics. The range is worldwide and some companies work on segmentation principles, allocating niches for best performance and results. The idea of 3PL is derived from Lean Technologies that require a company to have Lean manufacturing operations to remain competitive in the market. The purpose is to keep the company focused on its core activities that are manufacturing and marketing. Managing deliveries and warehousing involves a lot of unproductive time and heavy investments in assets which take a heavy toll of finances. It also results in uncertain costs and final costing is constantly affected. Very often a logistics company is required for large and regular movements and it is found prudent to engage such a company on regular contract to handle all logistics. These companies are also able to provide packing and warehousing facilities at agreed costs. This makes for an attractive cost package that can eliminate the uncertainties of final costing and makes for better competitive pricing. 3PL then becomes a transactional based strategic move and managements are going for more of these arrangements as it is a two way gain for both the company and the contracted logistics services provider. This is effect becomes part of the overall supply chain of the company as it links the suppliers, the company and the final customers. 3PL is a combination of services provided by a logistics company to its customer to package and moves its goods from point to point and also warehouse it in between if so required. Such destinations are often pre-determined and the frequencies worked out to manage a movement within set time frames at agreed costs. Typical services that are outsourced are Inbound or Outbound Freight, Custom & Freight consolidations, Ware Housing, Delivery to customers, Distribution Management and Order Fulfillment. Sometimes value added services offered or demanded like repackaging or return logistic management. 3PL becomes Integrated Logistics when all the above services are offered by a single firm to the company. This involves a deep understanding and close working between both parties and common understanding of problems and events. Efficient handling a turnaround are the keystones of successes for these operations. Advance planning and close monitoring are needed as well as tracking facilities must be in place to track every single item from its origin to destination. All these form part of Integrated Logistics. 4.2 Strategic Planning A characteristic that is common to many people is impatience. In order to sustain attention, people like to see quick outcomes. This includes everyone: managers, executives, planners, and employees in general. However, without Planning the outcome can only be chaos. Planning precedes all activities in Logistics. It calls for critical review of past performances by all departments. This will lead to developing a strategy for the medium term say next one to two years. This may also be split region wise to cater to the specific geographical requirements. This is the appropriate time to work out the details of the manufacturing of each product and decide on sales targets and marketing objectives. However these should be cohesive and must be coordinated with all concerned divisions or departments and properly spread and distributed. There must be clear instructions for each activity. The implementation of the plan is to be determined on the basis of the plan that has been finalized. Important milestones must be highlighted and the route to be taken is to be stated. Responsibilities on each department, and if possible, on individuals, must be set out. Monitoring methods must be put in place and review committees should also be framed to follow through with the activities and suggests improvements or to help out in case of bottlenecks or problems. 5 Marketing Strategies A natural extension of SCM is marketing. Indeed this is the purpose and objective of organizing SCM. The intention is of using a rationalized inventory deployment strategy for reducing order-to-delivery cycle time. Linking of the supplier to the consumer demands one more final link in the final leg of the supply chain. This has brought about the concept of Fulfillment Factories (FF). 5.1 Fulfillment Factories Warehousing is as old as business itself. There was always need for a store to keep extra goods which could be brought to counters and shelves as and when required at short notice. No business, especially retailers, big or small, can be complete without having a warehouse as the retail space is always far costlier than the warehouse space. The retail space was always meant for display of items and a certain ambience is required to let the customer move about freely making choices during his shopping exercise. In contrast warehousing was unglamorous cramped space filled with all kinds of goods waiting to be shifted to counters and shelves. With enlargement of retail into different section of food and non-food items, accessories and other household goods, the retail space has become more scarce and valuable. It is more profitable to use every inch of available space for display and customer movement than to store goods. Warehousing has become more important and has developed on lines that could supply replenishments at very short notice. This means planning and organizing the arrival and dispatch of goods that are required eventually in the stores. This further needs planning of purchases which are based on demand. With addition of hundreds of items in a modern retail outlet the complexity rose to a degree that warehousing became a specialized department that was vital for the survival of the system. IT support and an infrastructure was necessary to plan these movements and logistics became the focal point. The entire concept of warehousing changed and it became a Special Business Unit (SBU) and a profit centre by itself. Separate companies came up with the objective of setting up business of warehousing as a standalone activity. In larger retail chains they created independent divisions to form new and advanced warehousing facilities with logistics and having its own separate specialist and trained staff. The warehouse of yesterday now became a modern Fulfillment Factory (FF). From a small and humble store it evolved into a large and sprawling complex. This is how the Fulfillment Factory concept was developed and given shape. These are large warehouses that act as buffer between the suppliers and the retail outlets. They hold the inventory and manage the inflow of orders with outflow of deliveries in all directions. These FF could be owned by the retailers themselves or indeed could be independent companies serving more than one retailer. Their smooth functioning depends largely on the IT infrastructure of both hardware and software. These concepts were borrowed from Lean Manufacturing and woven into seamlessly with retail. There was yet another reason for establishing the FF. On-line sales through website are on the increase. They are being catered to by brick and mortar companies like Tesco, Wal-Mart in retail as well as car companies like General Motors. The all sell to their customers who like to walk into the virtual stores on the web, view the products, select and pay for it on line. There are others who are purely web based retailers like Amazon and e-Bay. They own no store and the only display is on their extensive website. This offers the customers a unique now format where he or she can shop anytime and from anywhere for a whole variety of consumer products. This has literally extended retailing to their homes. In this kind of set-up the only fall-back is the FF that can then service the customer. Huge FFs have come up at strategic points to cater to this new segment of customer. This phenomenon requires great logistic support and advanced technological backup, and both independent and in-house FFs are catering to fulfill this need. E-Tailing or selling goods through website are becoming an important part of retailing today. This can eliminate inventory altogether and here is the modern FF concept that comes into play. The benefit of web-based technology is that it assists suppliers to reduce inventory and become efficient. When there is sharing of information between the retailer and supplier, the latter schedule production more effectively. Similarly suppliers inform retailers of the schedules in advance reducing the inventory levels of the retailer. Sharing of information allows the company to raise its service levels as it is no longer concerned about supply side problems and the effective IT support offers it scope to redesign its supply chain system and focus more on the demand side. Suppliers now Push products in response to customer’s orders. There is real-time interaction between the supplier, the retailer, and the customer giving and seeking accurate information about what customers want. A good example of this is Dell who now is able to meet the customer’s specifications. This changeover from Customer Push to Customer Pull enables them to ship out products to the customer on the same day. It is a difficult performance, but when achieved it offers tremendous value to the customer and earns his loyalty for repeat orders. Of course this applies to consumer items and is suited to the food, apparel, and fashion goods that the retailers offer today. Most people accept ready made stuff rather than customized items and in this case the Pull system fetches the required item for delivery with relative speed as is the case in fast foods and grocery items. These items are low-cost low depreciation items. The frequently ordered items therefore will carry a larger inventory and will get serviced more quickly. The customized items are high cost and high specification items and will not be in inventory and will be supplied with some time-gap. Such items will be computers, bicycles, or cars. As will be seen the concentration of IT will be high-end and heavy in customized products that are made to order and will be low-end and less costly in case of ready made stuff. 6 Extension of SCM to Retail Time is a great constraint today and the customer is always in a great hurry. This is where the lean consumption can change the equation as the customer can actually obtain the item cost-effectively from alternate sources without compromising on time and price. The 4 P’s, Product, Price, Place and Promotion all are rolled in to a push based lean consumption approach; the supplier who is the lean provider looks at customer circumstances instead of consumer power and caters to his needs. Time therefore becomes more important as it is the biggest weakness of the consumer today. Order fulfillment needs tracking technology and logistics plays a vital role. It may be better at times to let a specialist handle this and outsourcing can be beneficial as well as cost-effective. Large players like Wal-Mart and Tesco started off by outsourcing this activity to FF and only when they were confident that they started their own centres. It must be understood clearly that fulfillment is a core competency by itself. Fulfillment companies have to have internal capabilities to handle both inward and outward logistics and have to invest heavily into infrastructure backed by intensive IT support to be able to deliver round the clock on time. 7 Technology A series of supplier/customer relationships exist in a normal supply chain and with several companies coming together to collaborate in making a transaction. The sequence of links and shared processes commences from acquisition of raw materials, interwoven manufacturing to final delivery to the consumers through a distribution system, with value additions at each stage. The optimization of all these activities is the ultimate aim of SCM and is the key to competitive advantage. Unfortunately this myriad of activities often does not work cohesively. The reason is not far to see. There are apparently too many disconnected activities and different organizations have diverse priorities. The need for a collaborative effort is not equal among them all. This calls for strategic planning on a massive scale by the company, its suppliers, manufacturers and the third party providers. A common minimum programme needs to be drawn up. So far this is not so difficult and in theory it appears feasible. In practice however things do not move entirely as planned or predicted. There is need of constant monitoring and for this an implementation programme is required. Technology has again come to the rescue of the SCM and use of lean technologies has provided the platform for each participant of the supply chain. From purchase to delivery there is a long supply chain and depending on the nature of the business the needs and requirements can be assed and designed into this system. The whole chain is integrated through SCM software that is commonly used by all participants. This ensures that the whole chain works for a singular objective ensuring that full collaboration is secured. Information flow is instant and action taking becomes predictive and decisions are fact based. Analytical capabilities add features that assist crisis management. 8 Conclusions Modern business, especially of the global variety, has become complex due to larger spread of markets. This requires great coordination with suppliers located in various geographies. But this is only one end of the spectrum. At the other end is the consumer. In the current scenario even he becomes part of the SCM by including his needs in the pull based system. The ultimate need of the consumer gets fed into the SCM system and working backwards it reaches procurement. A well organized SCM takes all this into consideration and is designed to serve every participant; purchaser, supplier, manufacturer, distributor, logistic support as well as the retail outlet that finally sells the product. In this sense the marketing strategy becomes part of the supply chain. 9 Bibliography Carr, A.S. and Smeltzer, L.R. (1999), “The relationship among purchasing benchmarking, strategic purchasing, firm performance, and firm size”, The Journal of Supply Chain Management, Fall, pp. 51-60. Farmer, D. (1997) Purchasing myopia – revisited European Journal of Purchasing and Supply Management, Volume 3 Number 1 March 1997, Butterworth-Heinemann Kohli, A., “Determinants of Influence in Organizational Buying: A Contingency Approach”, Journal of Marketing, Vol. 53 No. 3, 1989, pp. 50-65. Robinson, P., Faris, C. and Wind, Y., Industrial Buying and Creative Marketing, Allyn and Bacon, 1967. Sheth, J. N., “A Model of Industrial Buyer Behavior”, Journal of Marketing, Vol. 37, 1973, pp. 50-56. Read More