CHAPTER 3 SELECTING SUPPLY CHAIN STRATEGIES
In Chapter 2, the first phase of SCD was discussed. The first phase of SCD entails understanding the needs of the supply chain’s end customers and determining how to meet these needs. Once organisations understand their end customers’ demand and have determined how to meet these needs, they can start thinking about selecting a supply chain strategy. In Chapter 3 the second phase of SCD is discussed. This involves selecting a supply chain strategy. This is illustrated in Figure 3.1.
Currently, the emphasis is on competition between supply chains and not between organisations. It is essential to reach the end customer with the right product at the right time with the right price. Therefore, customer satisfaction and understanding the needs of the end customers are crucial towards selecting a supply chain strategy. Developing a supply chain strategy to meet the end customer’s needs can only be attempted when the markets are understood (Towill & Christopher, 2002:299; Mason-Jones et al., 2000:4061).
In Chapter 2 it was determined that the nature of the product that end customers want is a good indication of what their needs entail. It was also concluded that there essentially were two types of products. A distinction was made between functional and innovative products. Chapter 2 concluded that organisations need to meet the needs of end customers with a value proposition based on developed core competencies and identified market winners. Chapter 3 looks at supply chain strategies. The chapter starts by looking at how organisations can gain a competitive advantage based on their core competencies by either minimising costs or optimising value. This also forms the backbone when selecting a supply chain strategy, because organisations must now select a supply chain strategy on the basis of their product offerings and the way they intend to gain a competitive advantage. In this chapter, three broad supply chain strategies are discussed.
EXPLAINING SUPPLY CHAIN STRATEGIES
A supply chain strategy can be defined as a strategy required for managing the integration of all the supply chain activities through improved supply chain relationships to achieve a competitive advantage for the supply chain (Hines, 2004:5). Effective supply chain strategies provide organisations with radically new opportunities to create competitive advantage (Ross, 1998:334). Such strategies have to be defined to achieve the elusive goal of obtaining a sustainable competitive advantage by either optimising customer value or minimising cost (Hines, 2004:5; Wilding, 2002:12). Organisations thus want to select supply chain strategies that can achieve high levels of effectiveness by creating value and efficiency by minimising cost (Hines, 2004:105). Appropriate supply chain strategies are based on market characteristics and seek to achieve simultaneous higher levels of customer responsiveness at a lower total cost (Towill & Christopher, 2002:301).
A supply chain strategy determines the nature of procurement of raw materials; transportation of materials to and from the organisation; manufacture of the product or operation to provide the service; and distribution of the product to the end customer, along with any follow-up service and a specification of whether these processes will be performed in-house or outsourced. Given that organisations are rarely completely vertically integrated, it is important to recognise that the supply chain strategy defines not only what processes within the organisation should do well, but also what the role played by each supply chain member is (Chopra & Meindl, 2010:38). These processes and the role to be played by each supply chain member are discussed in Chapters 4 and 5 as part of the scoping of the supply chain structure. Supply chain strategies have to be revised constantly because competing supply chains learn of competitive advantages and, in their turn, try to improve on them (Wilding, 2002:12).
GENERIC STRATEGIES FOR GAINING COMPETITIVE ADVANTAGE
Supply chains must be designed for strategic advantage (Ayers, 2004:42). Competitive advantage is a special edge that enables an organisation to deal better with market and environmental forces than its competitors do (Lysons & Farrington, 2006:9). Since the previous millennium already, organisations have become increasingly interested in exploring the opportunities for competitive advantage that can be gained by leveraging the core competencies and innovative capabilities to be found among supply chain partners (Ross, 1998:ix). As noted, the flow of information, products and finances forms the backbone of SCM. The link between these flows is essential and competitive advantage can be obtained through the way in which organisations manage the flows in their supply chains (Mentzer, 2004:22). Basically, organisations can choose between one of three main generic competitive strategies to gain a competitive advantage. They are low cost, differentiation or focus strategies. A focused strategy may also employ cost or differentiation as its main strategy (Porter, 1985:11; Hines, 2004:121; Lysons & Farrington, 2006:42).
Organisations can have a competitive advantage due to cost advantages (Christopher, 2005:14). A strategy based on low cost essentially stresses offering a product in the market at a price or cost lower than that of competitors (Porter, 1985:12; Coyle et al., 2003:575, 576). Keeping the cost of products low allows organisations to offer their customers better value for money through competitive pricing. Focus on costs will be particularly important when organisations are in competition with low-price competitors (Hines, 2004:38). This, however, is easier said than done because there will typically be one competitor who will be the low-cost producer and often that competitor will have the greatest sales volume in the sector in many industries (Christopher, 2005:7). The main focus of this strategy is to continually work at reducing the cost price of the end product (Van Weele, 2010:185). Organisations that have this competitive advantage are known as cost leaders. Cost leadership strategies have traditionally been based upon the economies of scale gained through sales volume. If volume is to be the basis for cost leadership, then it is preferable for that volume to be gained early in the market life cycle (Christopher, 2005:10). There can be no doubt about the close linkage between relative market share and relative costs. Real costs per unit would decline at a given rate as volume increases (Christopher, 2005:7).
This strategy often requires a large capital investment in automated state-of-the art equipment and significant efforts in the areas of controlling and reducing costs, for example, by standardising services and aiming marketing efforts at low-cost consumers (Wisner et al., 2009:406). Organisations will put considerable effort into controlling, for example, production costs; increasing their capacity utilisation; controlling materials supply or product distribution; and minimising other costs, such as maintaining low levels of inventories, advertising and research and development (Prajogo, 2007:70; Rushton, Croucher & Baker, 2006:28). Price and costs are thus central in the negotiation process (Van Weele, 2010:185, 186). Striving to achieve a competitive advantage by means of a low cost strategy is effective when (Lysons & Farrington, 2006:42; Van Weele, 2010:185):
- the market comprises many price-sensitive buyers;
- a large market share can be obtained. This makes it possible to manufacture in large volumes, on streamlined production lines, with specialised production equipment;
- there are few ways to achieve product differentiation; and
- buyers are indifferent regarding brands.
Some potential threats to this strategy are that (Lysons & Farrington, 2006:42):
- competitors may imitate this strategy, thus driving profits down;
- competitors may discover technological breakthroughs; and
- buyer preferences may be influenced by differentiating factors other than price.
Differentiation (optimising value)
Organisations that apply a differentiation strategy operate in a completely different way to those with a low-cost strategy. There is far less attention to costs, although they are not completely ignored (Van Weele, 2010:186). The approach underlying a differentiation strategy is to make a product offering that is unique along some dimensions that are valued by customers (Porter, 1985:14) so that customers will be willing to pay a premium price. Typically, it means offering a product to the customer that is more valuable than those of competitors (Coyle et al., 2003:575, 576). The uniqueness can take many forms including customer service excellence, brand image, variety and use of technology (Wisner et al., 2009:407, 408). It can also be characterised by valuable features such as quality and innovation. Differentiation can be based on the product itself, the delivery system and a broad range of other factors (Prajogo, 2007:70). Therefore, a differentiation strategy aims at creating customer loyalty and brand preferences, thereby reducing the importance of price (Van Weele, 2010:186). A differentiation strategy thus aims to gain a competitive advantage by means of some form of value advantage (Christopher, 2005:37).
Organisations that have value as competitive advantage may be seen as service leaders (Christopher, 2005:11). Differentiation is created many times as the result of organisations listening to their customers (Wisner et al., 2009:408). The emphasis with this strategy is on close co-operation with other supply chain partners. This co-operation can be in the area of new product development, process and product improvement, quality control, lead time reduction and exchange of information (Van Weele, 2010:186). This may include the provision of a specially tailored service or the use of several different channels of distribution to ensure that the product is available in the marketplace in a number of different ways. It may also include a guaranteed service level (Rushton et al., 2006:28).
CHAPTER 1 INTRODUCTION TO THE STUDY
1.1 BACKGROUND: THE DEVELOPMENT OF SUPPLY CHAIN MANAGEMENT
1.2 KEY CONCEPTS IN THE STUDY
1.3 PROBLEM STATEMENT
1.4 OBJECTIVES OF THE STUDY
1.5 RESEARCH METHODOLOGY
1.6 REASONS FOR AND CONTRIBUTION OF THE STUDY
1.7 STUDY OUTLINE
CHAPTER 2 END CUSTOMER NEEDS
2.2 UNDERSTANDING END CUSTOMERS’ NEEDS
2.3 DETERMINING HOW TO MEET THE NEEDS OF END CUSTOMERS
CHAPTER 3 SELECTING SUPPLY CHAIN STRATEGIES
3.2 EXPLAINING SUPPLY CHAIN STRATEGIES
3.3 GENERIC STRATEGIES FOR GAINING COMPETITIVE ADVANTAGE
3.4 DIFFERENT SUPPLY CHAIN STRATEGIES
CHAPTER 4 SCOPING THE SUPPLY CHAIN STRUCTURE: SUPPLY CHAIN PARTNERS
4.2 STRUCTURAL DIMENSIONS OF THE SUPPLY CHAIN NETWORK STRUCTURE
4.3 SUPPLY CHAIN RELATIONSHIPS WITHIN THE NETWORK STRUCTURE
4.4 INTEGRATING SUPPLY CHAIN MANAGEMENT PROCESSES
4.5 SUPPLY CHAIN INTEGRATION
CHAPTER 5 SCOPING THE SUPPLY CHAIN STRUCTURE: SUPPLY CHAIN DRIVERS AND KEY PERFORMANCE INDICATORS
5.2 SUPPLY CHAIN DRIVERS
5.3 SUPPLY CHAIN KEY PERFORMANCE INDICATORS
CHAPTER 6 THE PROPOSED CONCEPTUAL FRAMEWORK FOR ANALYSING SUPPLY CHAIN DESIGN PRACTICES
6.2 SCD ELEMENTS OF PHASE ONE OF THE SCD: UNDERSTANDING THE NEEDS OF END CUSTOMERS AND DETERMINING HOW TO MEET THEM
6.3 SCD ELEMENTS OF PHASE TWO OF SCD: SELECTING A SUPPLY CHAIN STRATEGY
6.4 SCD ELEMENTS OF PHASE THREE OF SCD: SCOPING THE SUPPLY CHAIN STRUCTURE
6.5 THE CONCEPTUAL FRAMEWORK TO ANALYSE SCD PRACTICES
6.6 USING THE CONCEPTUAL FRAMEWORK TO ANALYSE PHASE ONE OF SCD
6.7 USING THE CONCEPTUAL FRAMEWORK TO ANALYSE PHASE TWO OF SCD
6.8 USING THE CONCEPTUAL FRAMEWORK TO ANALYSE PHASE THREE OF SCD
6.9 SUMMARY OF THE CONCEPTUAL FRAMEWORK
CHAPTER 7 RESEARCH METHODOLOGY
7.2 DEFINING BUSINESS RESEARCH
7.3 STAGE ONE: DEFINING THE RESEARCH OBJECTIVES
7.4 STAGE TWO: PLANNING THE RESEARCH DESIGN
7.5 STAGE THREE: PLANNING A SAMPLE
7.6 STAGE FOUR: GATHERING THE DATA
7.7 STAGE FIVE: PROCESSING AND ANALYSING THE DATA
7.8 STAGE SIX: DRAWING CONCLUSIONS AND REPORTING THE RESEARCH
CHAPTER 8 EMPIRICAL FINDINGS OF THE RESEARCH
8.2 GENERAL FINDINGS OF THE RESEARCH
8.3 BROAD ANALYSIS OF PHASE ONE OF SCD
8.4 BROAD ANALYSIS OF PHASE TWO OF SCD
8.5 BROAD ANALYSIS OF PHASE THREE OF SCD
CHAPTER 9 CONCLUSIONS AND RECOMMENDATIONS
9.2 THE DEVELOPMENT OF THE CONCEPTUAL FRAMEWORK FROM LITERATURE
9.3 TESTING THE CONCEPTUAL FRAMEWORK
9.4 GENERAL CONCLUSIONS AND RECOMMENDATIONS
9.5 LIMITATIONS OF THE STUDY AND FURTHER RESEARCH
9.6 A FINAL WORD
GET THE COMPLETE PROJECT
DEVELOPING A CONCEPTUAL FRAMEWORK TO ANALYSE SUPPLY CHAIN DESIGN PRACTICES