Global Supply Chain Strategy
Supply chain represents the sequence of processes and activities involved in the complete manufacturing and distribution cycle of any product. The process includes designing, procurement, manufacturing, and finally distribution to the point of sale. Chalasani & Sounderpandian (2004) describe supply chain as a network of collaborating partners who collectively engage in activities such as procurement and transformation of materials into products, and distribution of products to customers. Kaufman describes supply chain management as to … “remove communication barriers and eliminate redundancies through coordinating, monitoring and controlling processes” (Kaufman cited by Power, 2005). According to Handfield and Nichols (Cited by Power), three major forces drive towards an integrated approach to the effective supply chain management – the information revolution, increased levels of global competition creating a more demanding customer along with demand driven markets, and the emergence of new types of inter-organizational relationships. Due to increase levels of outsourcing, competitive pressures, increasing globalization, and increasing importance of e-commerce, supply chains gained complexity (Kathawala & Abdou, 2003). When companies perceived the benefits of collaborative relationships, the concept of supply chain management emerged (Lummus & Vokurka, 1999).
Supply chain strategy is meant to match the demand to supply which enhances customer satisfaction and drives down costs. This necessitates that uncertainties within the supply chain have to be reduced to the minimum but this may be difficult at times depending upon the type of product involved (Christopher & Towill, 2001). For example if a product is fashionable or in the fashion industry where the demand is constantly changing, because of its intrinsic nature, demand in unpredictable. This requires a strategy which could match the demand and supply. Lee (2002) contends that successful companies understand that the right supply chain strategy is dependent on certain factors. A product with a stable demand and a reliable source of supply should not be managed the same way as one with highly unpredictable demand and an unreliable source of supply. The internet can also be a powerful tool for supporting supply chain strategies with different demands and supply uncertainties.
To cater to the changing demands of the customers, some manufacturers take care of management of supply and distribution in addition to designing. Zara is one such Spanish clothing company, which has retained direct control over the entire process. Zara has been able to match the demand and supply in the highly volatile market. It uses proprietary information system to connect its stores to its headquarters. Zara employs specially designed hand-held devices or PDAs to keep track of the total order fulfillment process – plan procurement and production requirements, monitor warehouse inventories, allocate production to various factories and other suppliers, keep track of shortages and oversupplies (Ferdows et al., n.d.).
Hoffman et al., (2002), describe three types of market place, namely the Public e-markets, the consortia, and the private exchanges. In the public e-markets, many buyers and sellers converge at one point and it is open to public. Only equity holders and select trading partners have access to the consortia while the private exchanges like Wal-Mart and Dell computers are privately owned and can be accessed only through invitation. Here the focus is on the process rather than the price and is based on information exchange.
Dow Chemical started its private exchange with 200 customers in 1999 and by the end of 2001, they had 8000 customers spread across 35 countries (Hoffman et al.,). The customers benefit through this exchange as they can view their purchase histories, plan their future orders and check availability of products. The suppliers, on their part, get a clear picture of the buying habits of the customers and this helps them to forecast demand, control inventory, schedule manufacturing. The exchange can track all interactions with the customers and the company’s cost per transaction reportedly came down to $1 from about $50.
An effectively planned and managed supply chain strategy can impact the global organic coffee industry. According to FIBL and Naturland (2002), the global retail value of organic coffee was approximately USD223 million (cited by Claro & Claro). Besides, there was a 20% steady and annual growth in this industry. Organic food was very popular in Europe and particularly in Netherlands. In fact, in Europe, organic coffee accounted for 0.5 per cent of total coffee sales. Organic coffee was readily available in supermarkets and other outlets in Netherlands. Claro & Claro identified five issues, which needed collaborative efforts and co-ordination. Consumers were willing to pay premium for quality organic food. Traders and roasting companies did not have access to the market. Only those who sign long-term contracts with the producers have access. These traders and roasting companies who did not have access to the markets could not get certification unless they complied with the requirements of organic production. This certification would take up to 18 months. Companies producing organic coffee had to invest in fixed assets, which have no function apart from production of such organic coffee. This investment was also essential to produce the right quality. The roasting companies needed a separate line to roast and pack the organic coffee as it could not be mixed with normal coffee. Companies supplying and buying organic coffee were looking for direct and stable relationships (Gresser & Tickell, 2002 cited by Claro & Claro). Producers faced hazards of the climate; processing plants had to select and sort the coffee beans thoroughly while the roasting companies had to store, roast, grind and pack in a way that the attributes of organic coffee are retained. Hence, the trade is marked by uncertainties and risks. If all the units collaborate, they could find a mutually beneficial solution.
Based on previous research, Doney & Cannon (1997) point out that trust, long-term orientation and joint actions are developed through the sharing of information, the frequency with which companies interact, the investment in assets to better integrate activities and through time in which the counterpart has proven to be reliable in fulfilling transactions (cited by Claro & Claro). Calro & Claro proposed a model for the Brazilian producers, which would enhance their operations in the international markets. This model encourages trust, long-term investments, and planning. Customers are willing to pay premium, which can be done only when any industry has long-term orientation. This premium price thus collected can be reinvested for expansion and better coordination of the company. Their model ensures better coordination between the overseas producers and roasting companies. The entire supply chain can benefit from this.
This model suggested by Claro & Claro has a certification body, which ensures organic and fair trade practices. Cross border relationship remains healthy as there is a certification body. Personal contact between the integrator and buyers allow for proper exchange of information. Integrator helps in long-term orientation. Coffee is processed by the Processing service provider (PSP). They take care of the quality control before the coffee is shipped out. Joint planning eliminates any chances of miscommunication, assists in future production planning. This model functions on mutual trust, long-term orientation. It promotes joint problem solving attitude. The entire supply chain can be very efficiently managed.
Companies are moving closer to their customers and customer relationship management has become imperative. Technology has helped to add value to the service that General Motors (GM) was giving to its customers. GM is now able to constantly monitor, product and supply chain data apart from adjusting engineering, production, sales and distribution activities (Koudal & Wellener, 2003). GM has implemented an integrated network through which they have been able to connect the company with suppliers, customers, alliances, dealers and partners.
Sharing information requires trust on the part of all the participants in the supply chain (Lippert & Forman, 2006). Only through information sharing and tight control can one regain control over the supply chain. Barilla, Italian pasta is a case example. Pasta is a product that has both low demand and supply uncertainties. Overreaction by the retailers leads to high level of demand fluctuations causing significant waste and losses. Barilla managed to avoid such losses by initiating information sharing and coordinated replenishment programs and the supply chain efficiency was greatly improved. Inventory dropped by almost 50% and the stockout rates were down to almost zero.
Supply chain strategies that are innovative can provide a competitive edge to firms. Some aim to create the highest cost efficiencies in the supply chain and internet helps to have tight and effortless information integration apart from enabling production and distribution schedules to be optimized (Lee, 2002). Eliminating steps in the channel reduces costs as Wal-Mart has done. They have a direct-to-store distribution process for their stable high-volume products.
The risk-hedging strategy in supply chain allows the risk in supply disruption to be shared. Inventory pooling strategies are quite common in retailing where different retail dealers share inventory. Internet again helps in providing information transparency amongst members that share inventory. Saturn Corporation, a major US automobile maker, is an example of sense and respond supply. It has a service supply chain strategy which matches the urgency of the customers’ needs (Dawson, 2004). Saturn Corporation has a jointly managed inventory that involves sharing inventory with Saturn dealers. Its ability to match the parts supply critical to the customers’ needs has increased after sales satisfaction. Since the demand for parts is highly unpredictable in nature, Saturn has adopted the pull system. It does not position inventory for parts as per forecast but replenishes the stocks at the retailers on one-for-one basis.
Companies also need to be responsive to diverse needs of the customers and hence use build-to-order or mass customization process as a means to meet the specific needs of the customers. Dell Computers, the No. 1 PC maker uses technology for its direct sales model where the PC’s are made by electronic order and supplied directly to the customers. They have eliminated the middlemen in their supply chain and are an outstanding example of an innovative business model through effective SCM (Chou, Tan & Yen, 2004). Today Dell generates a new manufacturing schedule for its plants every two hours that reflects actual orders received. A combination of all these strategies is the agile supply chain strategy in which the firm uses pooling inventory to cater to the changing and diverse needs of the customers. While agility implies using market knowledge and a virtual corporation to exploit profitable opportunities in a volatile market place, leanness means to develop a value stream to eliminate all waste including time and to ensure a level schedule (Naylor, Naim & Berry, 1999).
Managing international supply chains encounters barriers like lack of global vision and manufacturing strategy (Akkermans, Bogerd & Vos, 1999). The technical concerns in managing international operations include logistics challenges to cope with long supply chains, search for qualified suppliers, culture and language differences and duty and custom regulations. Attention also needs to be paid to the coordination of good flows. To maximize competitive advantage all members within the supply chain should “seamlessly” work together to serve the end consumer (Mason-Jones & Towill, 1997). It is essential to improve pipeline performance by optimizing their response to consumer demand. Improvement techniques like just-in-time (JIT) and manufacturing resources planning (MRP) have been found to be effective. Supply chains should be redesigned so as to limit order magnification as the information moves up the supply chain (thereby reducing uncertainty) and reduce the time delay in receiving information (thereby retaining information value).
Thus the supply chain strategy should be well planned to suit the individual business needs. While information is essential, merely collecting data does not serve purpose. Firms have derived benefits from the supply chain strategy but risks come along with it. Since people from diverse technological backgrounds come together to form the supply chain, it is essential to develop synergy before proceeding. The effect of supply chain can be recognized only in the long-run and firms need to have mutual trust. Lack of trust becomes a barrier when firms or different partners in the supply chain are hesitant to share information. Firms need to be agile and change according to the changing market environment. Fair trade practices are essential for the success of the supply chain strategy. Hence, firms intending to integrate supply chain strategy into their business should take into account all of these factors.
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