Supply Chain Benchmarking
Throughout the history of mankind wars have been won or lost through logistics strengths and capabilities. It has been argues that the American War of Independence was lost by the British since they did not have proper supply lines and relied heavily on Britain. This resulted in poorly equipped and demoralized troops. Proper supply lines were established only in 1781 by which time it was too late to have any impact on the war.
Whilst Generals and Field Marshalls from the earliest times understood the importance of logistics it is only recently that organizations have come to realize the importance of managing logistics.
A central theme of these series of articles is to show that effective logistics management can provide a major source of competitive advantage.
The source of competitive advantage is found firstly in the ability of the organization to differentiate in the eyes of the customer, from its competition and secondly from operating at lower cost and hence at lower cost and greater profit.
Put simply, successful companies either have a productivity advantage or they have a value advantage or a combination of the two. The productivity advantage gives a lower cost profile and the value advantage gives the product or offering a differential over competitive offerings.
Let us take a brief look at the two methods of competitive advantage.
Productivity advantage – In any industry we will find that there is one company that is able to achieve highest sales and thereby also achieve the lowest cost per unit due to economies of scale. There is substantial evidence to prove that in these cases that ‘big is beautiful’ when it comes to cost advantage.
The experience curve has its root in the earlier concept of the learning curve. The learning curve effect was discovered in the second world war where is was seen that as the number of units produced increased every additional unit produced could be created using less time and resources. Subsequently Bruce Henderson of the Boston Consultancy Group extended this concept to state that all costs – production related or not reduced and the volume of output increased. In fact to be more precise, the relationship exists between real unit costs and cumulative volume. Further it is recognized that cost decline exists only for value added and not for bought in supplies.
Hence it has been accepted that one of the principle ways of improving cost advantage is through greater production and sales. However, through logistics we will demonstrate that there are multiple methods and means of improving cost efficiency through better logistics management.
Value advantage – it has long been an axiom in marketing that customers don’t but products they buy benefits. Put another this means that the product is not purchased for itself but for what it will deliver. The benefits may be intangible such as image or reputation. Unless the product can be differentiated in some way from the competition it will be seen as generic and will get only commodity prices. The values of the market can only be fully realized by segmenting the market and creating distinct value segments. In other words different groups in different markets place different values to benefits.
Adding value through differentiation is a powerful way of achieving a defensible advantage in the market.
Gaining Competitive Advantage through logistics
One of the distinguishing features of the value chain is to postpone the final creation of the product as much as possible. The idea behind this is that maximum flexibility can be achieved through postponement by obtaining time place and form utility. This can be achieved by aggregating production systems rather than catering to individual customer requirements.
Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product. Each of these activities can contribute to a firm’s relative cost position and create a base for differentiation… the value chain disaggregates a firm into its strategically relevant activities in order to understand the behaviour of costs and the existing and potential sources of differentiation. A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors.
Understanding logistics management
The mission of logistics management is to plan and coordinate all activities necessary to achieve desired levels of delivered service and quality at lowest possible cost. Logistics must therefore be seen as the link between the market and the company. The scope of logistics spans the organization from raw material management to delivery of the final product.
To achieve company wide integration requires quite a different orientation than what is seen in the conventional organizations.
The supply chain and competitive performance
Traditionally most organizations view themselves as entities that exist independently from others and indeed need to compete with them in order to survive. However such a philosophy can be self defeating if it leads to unwillingness to corporate in order to compete. Behind this seemingly paradoxical concept is the idea of supply chain management.
The supply chain is the network of organizations that are involved, through upstream and downstream linkages in the different processes that produce value in the form of products and services in the hands of the ultimate consumer.
A typical example of the new type of organization that we discuss is Apple Computers where over 90% of the cost of sales of a typical Apple computer is purchased content.
Clearly this trend has many implications for logistics management, not the least being the challenge of integrating and co-ordinating the flow of materials from a multitude of suppliers, often offshore, and similarly managing the distribution of the finished product by way of multiple intermediaries.
There are still some companies that will reduce cost and improve profit margins at the expense of supply chain partners. These companies do not realize that they are simply transferring costs upstream and downstream and this does not make them any more competitive. All costs incurred by intermediaries will ultimately reflected in the price charged from the end-user. The leading logistics companies recognize the fallacy of this conventional approach and instead seek to recognized
Logistics management is simply the management of flows of materials within the organization but supply chain management recognizes that this is simply not enough and linkages with external supply chain partners upstream and downstream is essential.
For the purposes of clarity we define supply chain management as:
“The management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole”
The changing logistics environment
As the new competitive context of business continues to change, brining with it new complexities and concerns for management generally, it also has to be recognized that the impact of these changes on logistics can be considerable. Of the many issues facing organizations today perhaps the most challenging are in the area if logistics.
The pressing issues facing organizations today are listed below:
- The customer service perspective
- Time compression
- Industry globalization
- Organizational integration
The new rules for competition
We are entering the era of supply chain competition – the fundamental difference here is that the company cannot act individually but must act as a supply chain entity to ensure competitiveness in the marketplace.
In today’s marketplace the order winning criteria are more likely to be service-based than product based.
The essence of competitiveness is given in the formula below:
Competitive Advantage = Product Excellence X Process Excellence
Whilst that are many implications of the pressures that are brought by supply chain management there are three key issues which will be recurring themes throughout the book: responsiveness, reliability, reliability and relationships.