Global Supply Chain Management

Global Supply Chain Management

Introduction

In Fisher’s (1997) discussion on supply chain management, he focused on a wide range of consumer products such as food, automobiles, and fashion apparel in his explanation of the need for different supply chains solution for functional or innovative products. The supply chain solution in each is dependent on whether the product is functional or innovative. Because of this factor, the designing of the supply chain strategy differs from one product to another since the products always exhibit different characteristics (Manuj & Mentzer, 2008: 141). The markets for the products are also diverse. Because of this, often times the manufacturing strategy is aligned to the market demands. Therefore, there is a great link between the market needs and supply chain. For effective supply chain, it is necessary to link the operation of the firm with the requirements of the market place (Simchi-Levi & Kaminsky, 1999). Often, a specific product condition or the condition of the market determines the operation strategy, sourcing strategy, and the route market (Manuj & Mentzer, 2008: 130). One character of functional products that is worth noting is that they are always stable and their demands can be easily predicted in terms of lifecycle, which is long. In the contrary, innovative products are characterized by a demand which is generally not predictable in the light of short lifecycles. According to Christopher and Towill (2002), in addition to this discussion, repleshment lead-time is also a very critical driver supply chain. The lifecycle predictable demand of functional products is always more than two years while that of innovative products is a range of three months to one year (Gopal, Partsch & Kamauff, 1998).

The nature of the demand is therefore very vital in the designing of the supply chain for any product. In any practice of developing an effective supply chain, the managers of the said company that produces the product must evaluate and establish the nature of demand for the product (Handfield & Nichols, 1999). The factors that should be considered here include the product lifecycle, the predictability of demand, market standards for lead time and service and the variety of the product. Functional products are basically those particular products that are used on a daily basis in satisfaction of basic human needs (Caniato, Golini & Kalchschmidt, 2012: 2). This is what makes these products stable in terms of the predictability of demand and the lifecycle. However, as stated by Fisher (1997), the stability of these products results to an increase in competition thus making their profit margin low. Because of this factor, a number of firms are engaged in innovation and new technologies that would persuade their customers to buy their products. The products that have subjected to innovation according to Fisher (1997) are fashion apparel and food.

It should be noted that the innovation makes the demand for the products to be unpredictable besides just enhancing the profit margin. Because of high profit margin associated with innovative products and volatility of their demand, they need a different supply chain in comparison to functional products which are stable and also characterized by low profit margins. The different functions played by the supply chain (physical function and market mediation function) are very vital in the understanding the difference in the supply chain for the two types of the products.

For the functional products, market mediation which is always applied in cases where the supply exceeds the market demand is always very easy since there is kind of a perfect match between the supply and the demand. For the firms that operate in functional products, they should always focus on the maximization of the physical cost (Cooper, Lambert & Pagh, 1997: 9).

By this approach, firms are able to freeze the schedules which give the opportunity to utilize manufacturing-resource-planning software which coordinates the aspects of ordering, production and delivery of supplies. This makes the supply chain to maximize on the production efficiency and inventory. In the case of functional products therefore, the important information circulates within the chain in the process of coordinating the activities for the purposes of meeting the predictable demand at cost which is low by the suppliers, manufacturers and retailers (Christopher, 2010).

The description above is very different when it comes to innovative products (Gopal, Partsch & Kamauff, 1998). There is always an increased risk of shortage and excess supply as a result of uncertain market reaction to innovation. The cost of shortage in this case is close associated with high profit margins. Because of short lifecycle in innovative products, there is always an increased risk of the cost of obsolescence and excess supply. Because of this, the market mediation cost is predominant in innovative products and the focus should therefore be on the market mediation cost not on the physical cost (Thomas & Griffin, 1996: 13). Early sales numbers and market signals are therefore very vital in this environment. Innovative products are characterized by the flow of information not only within the chain, but also from the market place to the chain (Mentzer et al., 2001: 12).

With regards to inventory and capacity, the focus is not on the cost maximization but on the positioning of the inventory and the available production capacity in chain for the purposes of hedging against demands which are uncertain (Fisher, 1997). Here, the choice of the suppliers is based on flexibility and speed, not on the low cost that they offer. In this discussion, it is worth noting that there products that can qualify as both functional and innovative. Examples with this regard include ice cream, personal computers, cars, apparel, cookies and coffee. This results to confusion in a number of firms as at times they are not always aware of the type of product that they operate in. Because of this, a number of firms keep moving from innovative to functional products without their knowledge (Handfield & Nichols, 1999).

The process of coming up with an ideal supply chain highly depends on the company’s ability to determine the kind of product they are dealing in (whether functional or innovative). Coming up with the supply chain strategy without taking into consideration the type of product would not result to any change. With this regard, therefore, the managers should have the knowledge of the products whose demands are predictable and those whose demands are not predictable. Worth determining also in the process of creating a market chain which is ideal is whether the supply chain of the firm is physically efficient or responsive to the market (Fisher, 1997). A suggested formula by Fisher (1997) is a matrix which helps in the formulation of an ideal supply chain. This matrix model has four cells which is a representation of the possible combinations with regards to products and priorities.

The matrix plays a vital role in plotting the nature of demand for each product and the supply chain priorities. This is a vital tool that can be used by managers to discover whether the supply process used by the firm to supply the products matches the type of the product. For instance, in the light of functional products, efficient process is necessary while for innovative products responsive process is considered necessary. There are problems that are therefore associated with those firms that have an innovative product with efficient supply chain and those that have functional products with a responsive supply chain (Mentzer et al., 2001: 23). These two cases are considered as a mismatch in the matrix. An efficient chain for the supply of the functional products is very necessary for any firm. However, there are a number of firms that find themselves in a scenario where they employ responsive process for functional products. As observed by Fisher (1997), it has always been noted that the benefits associated with investing supply chain responsiveness improvement by firms with innovative products are higher in comparison to investing in the improvement of supply chain efficiency. Investment in the improvement of chain responsiveness would make the firm to have a decrease in the cost of stockouts and forced markdowns on the excess inventory which is as a result of the mismatch between demand and supply (Caniato, Golini & Kalchschmidt, 2012: 2).

Fisher (1997) notes that there is high economic gain that is associated with the reduction of the stockouts and excess inventory in the investment in the improvement of supply chain responsiveness. For instance, Compaq made a decision to continue producing a high variety short lifecycle circuits in house in comparison to outsourcing for the same products in low cost Asian countries. This was attributed to the fact local production was associated with flexibility and short lead time. It should be noted that this do not apply to functional products (Lambert, Cooper & Pagh, 1998: 12).

Because of high introduction of new products as a result of increased competition, a number of firms have been engaged in the transformation of the functional products into innovative products while maintain physically efficiency in the supply of the very products. This has, however, resulted a number of broken chain of supply. The same would be the case in instances where the unresponsive chains are used to supply innovative products in personal computers and automobile industries (Tayur, Ganeshan & Magazine, 1999).

With regards to the efficiency of supply of functional products, it is important for any company to be aware of the impact of the overuse of price promotion on the physical efficiency has demonstrated by Combell. It is always wise to pursue physical efficiency for functional products. It has been noted that a number of functional products highly price sensitive making the negotiation along the supply chain very fierce (Arntzen et al., 1995: 89). Hence, in cases where a company is capable of persuading its suppliers to increase the prices and the customers to accept the increase, there would be a huge impact on the profit made by the company. This is a competitive model of chain supply relations which is characterized by an assumption that the cost in the chain is fixed and that the manufacturers and the retailers uses price negotiations for the purpose of competing for the larger share. Worth noting in Combell’s model is that the manufacturers and the retailers corporate in cost cutting through the system. Despite the fact that this corporative model is very powerful, it also has a number of challenges which are associated with it. It is always not easy to share information in an absolute sense (Cooper, Lambert & Pagh, 1997:8).

Since innovative products are always associated with uncertainty of demand which is an intrinsic aspect of the innovative products, companies employ a number of tools to solve this problem of uncertainty of demand (Magretta, 1998: 110). Companies should however, accept the fact that uncertainty is an inherent factor in innovative products. This is very first is coping with uncertainty of demand that is associated with innovative products as stated by Fisher (1997). Fisher asserts that the uncertainty associated with innovative products must be accepted as good. The greatest contributed factor in the uncertainty of demand and risk associated with innovative products is the high profit margins that they characterized with. Fisher (1997) suggests that the companies can after accepting the uncertainty, can reduce the uncertainty by getting factors that would help act as indicators or by having the products to share a common component to make the demand of the component more predictable. Increasing the flexibility of the supply chain and cutting of the lead time is also a way that can be employed to avoid the uncertainty of demand in innovative products. Inventory and excess capacity buffers can also be used in solving the problem of uncertainty of demands of innovative products (Cooper, Lambert & Pagh, 1997: 29).

With a background of high global competition and excess supply in relationship to the demand, there is always a risk that is associated with this kind of context. The danger here is because of the pressure to take out costs that may taken by sub-optimal supply chain. An example is the introduction of just-in-time delivery which may reduce the inventory in the firm. This is also associated with the increase in supply and the cost of transport (Lambert, Cooper & Pagh, 1998: 19).

Many at times, what a number of firms deem to be cost saving, may result to result to increment in the cost of the supply chain cost. It is always therefore necessary to adopt a holistic to management of supply chain for the purposes of avoiding sub-optimization. The premise here is based on the argument that it is the supply chains that compete, not the firms (Lambert & Cooper, 2000: 70). In supply chain management (SCM), the selection of suppliers, distribution channel choice and the location of facilities are driven by the goal of achieving the marketing objectives of the organization. Christopher et al note that the supply chains should be designed from the customers backwards as to the conventional approach which is factory outwards. In this kind of approach, there is an effort to form supply chains which are focusing more on the efficiency goals rather than effectiveness goals. The aim of a supply chain strategy should be to achieve a smooth flow at a minimum cost (Arntzen et al., 1995: 82).

The recent past has been characterized by change in the traditional of local to local manufacturing and sourcing due to the impact of globalization (Cooper, Lambert & Pagh, 1997:11). Most companies embraces cost saving by shifting their manufacturing to emerging economies. This is because of low cost of labor and minimum regulatory controls in such regions as compared to the developed world. Chine is leading destination for manufacturing that a number of companies have established their firms. This has been a common thing in the context of international trade. Lowering manufacturing cost which at times outweighs the cost of transport and the longer lead times is associated with commodity items does not apply to the innovative products that are identified by Fisher (1997).

For companies to realize success in a world characterized by global sourcing, then it is imperative for them minimize as a result of failed products and maximize on the benefits of successful innovation. This should be done at the right before the fall of the margin due to the entry of products which cheap and less risky from the competitors. This is what the electronic Company (Sony did). In the International Trade, it is very vital for one to come up with a supply chain that best fits the demand of the market. Global sourcing has greatly contributed in the increase of lead time is an important factor in supply chain. This has also resulted to an increase of supply chain risks (Arntzen et al., 1995: 84).

Conclusion

In the case of functional products, it important to apply lean concept which thrives in a context where the demand is stable, the focus of lean thinking is on waste elimination. The production system of Toyota is based on this concept and they are focused on the use of resources in a more efficient way. The concept of agility will work for innovative products. This is because of the fact that its major focus is on the responsiveness. Its ability to match the supply and demand in fragile and unpredictable market makes it the best fit for innovative products as discussed by Fisher (1997). The kind of organizations that embraces this strategy is characterized by flexibility in terms of manufacturing systems.

References

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