Supply Chain and Competitive Advantage (E)
What is the difference between logistic management and supply chain management? What is the contribution of supply chain to company's competitive advantage?
Posted: Jun 2009
Most organizations consider themselves as entities that exist independently from others. They compete with others in order to survive. However, such a approach can be self-defeating if it leads to an unwillingness to cooperate in order to compete. Opposite to this concept is the idea of supply chain integration.
The supply chain is the network of organizations that are connected, through upstream and downstream links, in the different processes and activities that produce value in the form of products and services that are delivered to consumer. For example, a oil refinery is a part of a supply chain that extends upstream through the oil rigs and oil transporters, and downstream through distributors and retailers of oil based products to the final consumer. Each of these organizations in the chain are dependent upon each other. They do not closely co-operate with each other.
Supply chain management is different from sheer "vertical integration". Vertical integration usually involves ownership of upstream suppliers and downstream customers. Previously this was considered to be desirable approach. But today, increasingly organizations are now focusing on their "main business" – the things they do really well and where they have a differential advantage. Everything else is "outsourced" – it is procured outside the company. For example, companies that used to made their own components now only assemble the finished product.
During the previous years it was often the case that relationships with suppliers and downstream customers (such as distributors or retailers) were more opposing than co-operative. It is still happening today that some companies will seek to achieve cost reductions or profit improvement at the expense of their supply chain partners. Companies such as these do not understand that simply transferring costs upstream or downstream does not make them any more competitive versus other companies. The reason for this is that finally all costs will make their way to the final marketplace to be reflected in the price paid by the end user. Therefore, the leading-edge companies recognize this and they are looking for solution that will make the supply chain as a whole more competitive through the value it adds and the costs that it reduces overall. They have realized that the real competition is not company against company but rather one supply chain against the another supply chain.
This concept of supply chain management is relatively new and is different from logic of logistics. Logistics management is primarily concerned with optimizing flows within the organization, whilst supply chain management understands that internal integration by itself is not enough. Historically, the flow from logistic management was in 4 stages:
Historically, the flow from logistic management was in 4 stages:
First stage incomplete functional independence where each business function such as production or purchasing does their own thing in complete isolation from the other business functions. An example would be where production seeks to optimize its unit costs of manufacture by long production runs without regard for the build-up of finished goods inventory and heedless of the impact it will have on the need for warehousing space and the impact on working capital. This is also called functional thinking.
Second stage recognized the need for at least a limited degree of integration between adjacent functions, e.g. distribution and inventory management or purchasing and materials control.
Third stage requires the establishment and implementation of an 'end-to-end' planning framework.
Fourth stage represents extension of third stage to upstream suppliers and downstream customers. This is what truly makes distinction between logistics and supply chain management.
The stabile, lean and agile Supply Chain is the backbone of the sustainable competitive advantage of the company.