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Lesson 38
Supply chain includes all the activities associated with the flow and transformation of goods from the raw
materials stage all the way to the end user. Supply chain can be broken into three parts, that is, upstream
activities, internal activities and downstream activities.
Upstream activities relate to materials/services or the input from suppliers
Internal activities relate to manufacturing and packaging of goods
Downstream activities relate to distribution and sale of goods to distributors/customers
Fig. 1 below shows a simple example of supply chain of a milk processing unit. Note that milkmen supply
milk to the processing facility. The processing business has ordered a corrugate paper company to supply
boxes/paperboard for packaging. The paper company receives its raw material from a lumber company for
manufacturing boxes. The lumber company also supplies paper to label printing business for
making/printing paper labels. These are upstream activities. The boxes and labels should be available to the
processing business at the packaging stage. The milk processing unit processes the milk, packages it in
boxes and attaches labels to them. These are internal activities. The packaged milk is sent to distributors
who distribute the same at different stores from where customers purchase. These are downstream
The Milk
Processing Unit
Supplier of
Paper Co.
Fig. 1
Supply chain management
Engaging and negotiating with suppliers can be extremely beneficial. The process of taking active role in
working with suppliers to improve products and processes is called supply chain management. Today, firms
are reaching beyond limits of their own organizational structure. They are creating new network form of
organization among the members of supply chain. Supply chain management is now used to add value in
the form of benefits to the ultimate customer at the end of supply chain. It has become important for a
business to work to establish long term relationship with at least small number of capable suppliers.
Internet technologies and supply chain
Internet is a very quick and effective tool of communication. On the other hand, communication is also a
very critical element in supply chain management. Using internet technology:
suppliers can share any information about changes in the customer demand;
suppliers can have immediate notice of any changes in product design;
drawings/specifications of a product can be quickly provided to the suppliers and vice versa;
processing speed of a transaction can be increased;
cost of handling a transaction can be reduced;
chances of errors in entering transaction data are reduced;
Probably, the only disadvantage of using internet technology in a supply chain is that sometimes it may
prove to be costly. However, in ultimate analysis, the advantages override the cost factor.
With the help of supply chain management software, one can not only manage the internal processes but
also processes of other members of the supply chain. Therefore, it can be predicted that when and how
much of certain product would need to be produced.
Examples of technology use in supply chain
A typical example of the use of technology in supply chain management is a company which is well-known
worldwide as the largest producer of commercial aircrafts. It makes a big effort to keep its production on
schedule. Most commercial airplanes require more than 1 million individual parts and assemblies and each
airplane is configured according to specific needs of the purchasing airline. Timely availability of these parts
must be ensured otherwise entire production schedule would be disturbed.
In 1997 the company had to stop its two assembly operations for several weeks due to errors in production
and scheduling system causing it a huge financial loss. Thereafter, it decided to invest in information
systems in every element of its supply chain. Involving its suppliers in the process, it began the use of EDI
and internet technology, so that the suppliers could supply the right part or assembly at right time to
prevent production delay. Now, the suppliers could get engineering specifications and drawings before the
start of manufacturing using a secure internet connection, and plan their own business activities,
accordingly. Also, members of the supply chain could have the knowledge of the completion of milestones
and any changes in production schedule. In two years time, this approach resulted in reducing half the time
needed to complete individual assembly processes. Thus, instead of waiting for 3 years the customer airlines
could now have the ordered airplane ready for delivery in 10-12 months. Furthermore, the company
launched a spare parts web site for ordering replacement parts. The site allowed customer airlines to register
and order for replacement parts through browsers. Soon, the site was processing 5000 transactions per day
at much lower cost as compared to orders cost through phone, mail, or fax. It also improved customer
service in the sense that most parts could now be delivered the same day or the next day.
Another example is of a famous computer selling brand. It realized that by increasing the amount of
information about its customers it was able to reduce amount of inventory it should hold. It decided to
share this information with other members of the supply chain by allowing its top suppliers to have access
to a secure web site which informed them about its latest sales forecasts, planned product changes or any
warranty claims etc. It also provided information about its customers and their buying pattern. Thus, it
helped suppliers to plan their own production in a much better way.
The above examples show how members of supply chain can work together to reduce inventory, increase
quality of product, reduce production cost and increase process speed.
Supply chain and ultimate consumer orientation
Primary objective of supply chain is to help each company to meet needs of the consumer at the end of
supply chain. This approach is called ultimate consumer orientation. In 1995, a company dealing in the
business of production of tiers in America adopted a different approach by shifting its focus on tire dealers
from ultimate customers. It created an extranet that allowed tire dealers to access tire specifications,
inventory status and promotional information on the web. Thus, it gave opportunity to dealers to access
product information directly and immediately. It also saved money since a web page is less expensive than
answering thousands of phone calls daily by the company. This initiative provided a better service to
dealers, so dealers using this extranet were not likely to recommend to customers a tire from the competing
Competitive Strategy
Ability of an organization to prosper arises from its competitive advantage over other organizations
operating within its market sector. The strategy of a business to achieve this goal of competitive advantage
is known as competitive strategy. Three basic strategies for competitive advantage are as under:
Cost leadership
Cost leadership
It is the ability to sell the goods or provide the service at a price that is lower than that of competitors, and
thus attract more customers.
Differentiation means that your product/service has certain quality that makes it more attractive than the
one offered by your competitor, despite the price of your competitor's product/service is somewhat lower.
For instance, you can beat your competitors for the reason that the air conditioner produced by your
company is unique as it does not produce noise while in operation, whereas this feature is missing in the air
conditioners produced by your competitors.
Focus strategy is defined as concentration on a single aspect of the market. That single aspect can be a
particular market segment or market area or product type. For example, if my competitors are focusing on
different market areas, I may, on the other hand, plan that I can be more profitable by concentrating on one
particular area. It may be a particular province or a city etc. where I may have a better distribution channel.
Role of e-commerce in Competitive Strategy
By applying EC following major benefits can be derived:
Reduced administration/transaction cost
Since things can be done electronically, so infrastructure or overhead cost (cost of building, staff, stationary
etc) is reduced. Similarly, you can sell directly to your customers and it eliminates the cut/revenue payable to
intermediaries or dealers. Thus, EC helps in achieving cost leadership.
Improved logistics supply chain
Using EC one can have a quick response to the order placed. In other words, just in time delivery of the
material is possible. It helps in reducing inventory and overall production cost and achieving cost
With the help of EC, customer data can be gathered and analyzing it customers can be served in a better
manner according to their needs. One can, thus, implement differentiation and focus strategy.
Differentiate a product in terms of quality of service
For example, online business of sale of music or books etc. In such cases delivery time and transaction cost
is saved as customers can directly download the product from the web site, thus, it helps in achieving cost
leadership and differentiation.