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Critical Success Factors in Supply Chain Management

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ABSTRACT

In today's turbulent economic environment, firms are striving for ways to achieve competitive advantage. One of the approaches is to manage the entire supply chain to reduce costs and improve performance to create competitive advantage and business success.

This dissertation explores and investigates how high technology firms use supply chain management to gain competitive advantage and increase business success. The research objective is to determine the critical success factors in supply chain management at high technology companies. This dissertation provides a theoretical framework to understand a firm's performance and argues that supply chain management will help a firm to be competitive and successful. To this end, the critical success factors that make a company more competitive are identified.

The research design is based on the established and recommended procedures of multiple case study research methodology; and this methodology is used to gather data from five companies in California, USA. The analysis is based primarily on cross-case analysis for the purpose of theoretical generalization about the research issues.

The results identify two clusters of company behavior and characteristics, specifically traditional ‘old style' manufacturing companies and progressive manufacturing companies. Each cluster of company behaves differently. At the traditional manufacturing companies, the selection of critical supply chain management factors is internally focused on factors that are manufacturing and quality focused, while at the progressive manufacturing companies the selection of critical supply chain management factors is externally focused on factors that are directed to customers and information systems.

There are differences between critical supply chain management factors at high technology companies and benchmark (or commodity) companies that were selected in this study. The benchmark companies select supply chain management factors that focus on customer services and quality. This approach is, possibly, due to the fact that the benchmark companies deal in commodity type products and hence they have to focus on differentiating themselves through strong customer services and quality products.

Additionally, with the help of supply chain metrics, financial performance data, and understanding the various companies, it is possible to determine which critical supply chain factors best can contribute to business performance. At the case study companies, an external focus on supply chain management factors such as a strong focus on customer relationship and management, gives better business results.

Finally, this study has proposed a novel and new approach to improving customer satisfaction by using QFD methodology to identify performance gaps (and opportunities) from the customer's viewpoint in supply chain management. If the companies wish to increase customer satisfaction, they have to use the QFD methodology to identify critical supply chain factors. The reason is primarily because performance gaps derived from customer needs emphasize what the customer wants and that is different from the internal perceptions of a company's managers. The initiatives that provide the greatest opportunity have been identified in this analysis.

Overall, these findings can be used by high technology firms to select supply chain strategies that will lead to sustainable competitive advantage and hence improve their brand and business performance.

CHAPTER 1

INTRODUCTION

The genesis of this dissertation was a request from a high technology company to investigate the company's supply chain system and identify factors affecting the successful implementation of supply chain management. This chapter serves as an introduction to the dissertation. It comprises eight sections, which cover the background to the research, objective of the research and the research questions, justification and significance of the research, a brief description of the methodology, an outline of the structure of the study, key definitions, delimitations of this research, and the chapter's conclusion.

1.1 Background

A firm's strategies, innovations, and well-planned activities will lead to sustainable competitive advantage and hence improve its brand and business performance. As firms strive for ways to achieve competitive advantage, they are looking for new ideas and solutions. This dissertation addresses the topic of competitive advantage, reviews how firm's attempt to achieve it, and focuses on one aspect of competitive advantage - managing the supply chain to increase competitive advantage and business success.

The early understanding of competitive advantage is based on Leon Walras (1874, 1984) theory of perfect competition. In perfect competition products are homogenous, consumers and producers have perfect information, prices will reach equilibrium, and as a result profits are zero in the long run. A later approach is the Industrial Organization approach (Tirole, 1988), which argues that success comes from market power and a firm's efficiency. However, the proponents of this approach agree that in the long term there would be industry equilibrium and little profit.

One of the first researchers to propose a theoretical framework for understanding a firm's performance is Michael Porter (1980). He takes a strategic and analytical approach to understanding competitive strategy, and argues that, “Every firm competing in an industry has a competitive strategy, whether explicit or implicit.” Porter asserts that, except for microeconomic theory, the strategy field and literature had offered few analytical techniques for gaining this understanding. Porter (1980) argues that with the right approach it is possible to break away from the economic equilibrium situation and achieve superior performance. Therefore he proposes a framework for analyzing industries and competitors and describes three generic strategies - cost leadership, differentiation, and focus. He postulates that to be successful, the firm has to do well in one or more of these strategies.

Porter's (1980) ideas and proposals on achieving competitive advantage have influenced many other researchers to propose complementary theories on achieving competitive advantage. All the theories proposed by researchers are supported with examples of winning strategies implemented at renowned companies. The theories include an emphasis on planning (Porter, 1980, 1985), strategic approach (Hamel and Prahalad, 1990, 1998; Porter, 1985, 1990, 1991), marketing strategies (Day, 1994, 1999), value chain management (Porter, 1985), and supply chain management (Christopher, 1998; Poirier, 1999; Tyndall et al., 1998).

A theory that has gained momentum in the last few years is the concept of supply chain management. In recent years, there have been numerous advances and developments in supply chain techniques and management. One of the reasons is that as trade barriers drop and markets open, competition has become more intense - hence companies need to be more competitive and cost effective. An initiative to help achieve this is a supply chain management program. Supply chain management is the management of upstream and downstream activities, resources, and relationships with suppliers and customers, which is required to deliver products or services. In theory, if this is done well it will lead to competitive advantage through differentiation and lower costs as suggested by Porter (1980). Moreover, some researchers claim that effective supply chain management can reduce costs by several percentage points of revenue (Boyson, et. al, 1999). Furthermore, there has been little verification or research done on measuring competitive advantage gained through supply chain management.

Supply chain management is not a static concept or solution. Instead, new advances and techniques for supply chain management continue to mushroom. This tremendous growth in new ideas and processes is starting to influence and change the business processes and models of companies. Hence companies have many choices in selecting programs in supply chain management. In making their choices, companies need to plan for effective supply chain management, in order to gain competitive advantage.

However, to ensure that effective supply chain management can provide business success, this study must determine the critical success factors in supply chain management that can provide competitive advantage. Furthermore, these critical success factors must be identified and conveyed to senior management in firms that want to have an effective supply chain management program.

1.2 Objective of this research

The objective of this dissertation is to explore and investigate how firms scope, design, and implement supply chain management in order to gain competitive advantage. Most importantly, this dissertation endeavors to determine the critical success factors in supply chain management that can provide competitive advantage. It also explores and investigates the advances and new ideas in supply chain management and examines how firms scope, design, and implement supply chain management in order to gain competitive advantage.

The genesis of this dissertation was a request from a high technology company to investigate the company's supply chain system and propose improvements to help make it more competitive. The company is headquartered in California USA, and this author works for one of the company's business unit as General Manager for Distribution. The request was to investigate the company's supply chain management system and to propose improvements that would make it more competitive

This dissertation provides a theoretical framework to understand a firm's performance and argues that supply chain management is an approach that will help a firm to be competitive and successful. Furthermore, in using supply chain management, firms are faced with choices on what supply chain techniques and developments to adopt for their businesses. This dissertation wil review the choices that high technology companies have today, and will make recommendations to select the best choices, or critical success factors, based on business and customer needs. Therefore, the research objective is to:

Determine the critical success factors in supply chain management at high technology companies.

In fulfilling this objective, this dissertation also addresses the following research issues:

1. Are there differences between critical supply chain management factors at various high technology companies?

2. Are there differences between critical supply chain management factors at high technology companies and non high technology (or benchmark commodity) companies?

3. Will a focus on external supply chain management factors give better business results?

4. Are perceived critical gaps (and opportunities) in performance derived from traditional methodology similar to those deployed from customer needs?

In this study, the critical success factors to make a company more competitive are identified. To ensure a robust analysis and conclusion, the expectations and perceptions of respondents, involved in this study, are taken into consideration as well as customer requirements.

1.3 Significance of the research

There are many theories and empirical studies on competitive advantage. However, the empirical studies, using mathematical models, tend to be limited in scope (Porter, 1991; Buzzel and Gale, 1990), and do not include supply chain management parameters. While there has been much research on activities that can provide competitive advantage, there is little knowledge on the process of selection and impact of supply chain management on the competitive position and business performance of a high technology firm. Firms need to understand how supply chain management can help them achieve competitive advantage. Furthermore, there is an expectation that high technology companies will use leading edge technology and invest heavily in supply chain management. This dissertation makes the following contributions:

1. Fulfils a request from a high technology company: The author of this study works for a high technology company, head-quartered in California USA, and was requested to investigate the company's (business unit) supply chain system and propose improvements to help make it more competitive.

2. Identifies the critical success factors in supply chain management from a high technology company's viewpoint. Often when reviewing critical success factors, only the perception of respondents is taken into account. However, in this analysis both the perceptions and expectations of respondents are taken into consideration. Such an analysis will be more robust and will allow performance gaps to be analyzed and understood.

3. Identifies the critical success factors in supply chain management from customers of high technology companies. To enhance the relevance of the conclusions, customer requirements are also taken into consideration by using the quality function deployment (QFD) methodology and these are compared to the high technology companies' performance gaps. Such an analysis will allow performance gaps to be analyzed and understood from the viewpoint of customers of high technology companies.

4. Contributes to the understanding of how high technology companies scope, design, and develop their supply chain management system.

1.4 Research Methodology

This study employs the qualitative research process using multiple case studies. There are several reasons for this: Since the focus of this research is on high technology companies operating in California, USA, there is a concern that there will be a small number of companies willing to participate in a large (sample size) quantitative survey. Furthermore face-to-face meetings with respondents can help provide understanding and information on several qualitative areas, such as: reasons for implementing specific supply chain factors (or strategies), customer needs data, and discussions and feedback on the questionnaire. Also, cases can be viewed and studied alone and across cases to provide comparison and contrast and richer details and insights regarding the research issues (Eisenhardt 1989; Stake 1994; Yin 1994). Hence this research will be done via a multiple case study approach using structured interviews with a questionnaire (Yin, 1994).5

1.5 Structure of the dissertation

In addition to this introductory chapter, this dissertation consists of four chapters ( 1.1). Chapter 2 reviews the relevant literature, addresses the disciplines under investigation, and provides an overview of competitive advantage. The chapter then provides a detailed review of the current literature and practices of supply chain management. With that as the background, chapter 2 continues into identifying gaps in the literature and provides the rationale for selecting the research topic and issues. Chapter 5Conclusion and opportunities for further researchChapter 1IntroductionChapter 3Research methodologyChapter 2Literature review and research issuesChapter 4Data analysis and interpretationsChapter interpretations

Chapter 3 discusses the research methodology used for this study and it includes: the justification of the research methodology, a discussion on preparation of the questionnaire and the data gathering process, the process used for data analysis and determining gaps, the process used to generate recommendations from the data, and concludes with a discussion on the limitations of case study research.

Chapter 4 summarizes the data collected from the selected companies and respondents and aims to interpret the data in relation to the research objective. Each of the four research issues is analyzed, interpreted, and the detailed findings are presented. The chapter concludes with a summary of the research findings.

Chapter 5 provides a summary of the findings and conclusions of the research objective and issues, discusses the contribution of the research findings to the literature and theory, reviews the implications of the findings, discusses the limitations of the research, and concludes with suggested direction for future research.

1.6 Key definitions

Definitions adopted by researchers are often not uniform; hence key terms are defined to establish positions taken for this dissertation (Perry 1998). This will ensure that subsequent research, undertaken at a later stage, will better measure and compare what this dissertation has set out to do.

• Logistics: The management and movement of product and services, including storage and warehousing, and their transport via air, land, and water (Coyle, Bardi, and Langley, 1988).

• Supply chain: Consists of all inter-linked resources and activities needed to create and deliver products and services to customers (Hakanson, 1999).

• Supply chain management: This includes managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, distribution across all channels, and delivery to the customer (Supply Chain Council, 2001).

• Supply chain agility or agile supply chain: An agile supply chain is one that is flexible and has a business-wide capability that embraces organizational structures, information systems, and logistics processes. (Christopher, 2000)

• Critical success factors (CSF): Critical success factors are those few things that must go well to ensure success for a manager or organization, and therefore may represent those managerial or enterprise areas that must be given continual attention. CSFs include issues vital to an organization's current operating activities and to its future success (Boynton and Zmud, 1984).

• Customer relationship management (CRM): CRM is the management of technology, processes, information, and people in order to maximize each customer contact by obtaining a 360-degree view of the customer (Galbreath and Rogers, 1999).

• Performance gap: This is a gap between the perceived performance and the expected importance of a factor (in this dissertation it is a supply chain factor). The performance gap provides an indication as to whether executives and managers are successful in translating their vision to their employees and hence such perception may give an indication regarding the degree of employees' alignment with the organization's vision. If a factor is critical and has a negative value of factor alignment (perceived performance is less than the expectation), then the organization may have a potential problem with that factor. Information on factor alignment allows executives to develop a strategy to overcome the challenges associated with the gaps between importance and performance. (Martilla and James, 1977).

• Quality Function Deployment (QFD): QFD is a comprehensive quality tool that can be used to uncover customers spoken and unspoken needs, and convert these needs to product or service design targets and processes (Akao, 1990).

1.7 Delimitation

There are several delimitations in this dissertation.

• The theoretical model derived from this dissertation is only applicable to the high technology companies.

• The dissertation is focused on companies operating geographically in California, United States of America, where there is a concentration of high technology companies.

• This dissertation is an exploratory research and will have to be tested for generalizability in later, more extensive, quantitative research (Perry, 1998).

• There is no scientific basis for choosing the number of cases in this dissertation. The number selected is based on the experiences and recommendations of the research and academic community (Eisenhardt, 1989; Perry, 1998).

1.8 Conclusion

This chapter provides an overview of the dissertation. The aim, objectives, and justification of the research topic were discussed. The dissertation is an investigation on the impact of a supply chain management system on the competitive position of high technology business firms. It explores and investigates new ideas in supply chain management and examines how high technology firms manage and improve their supply chain management system. Furthermore, this dissertation will analyze the gaps and opportunities for supply chain management in high technology companies and give a set of recommendations. The methodology was briefly described, key definitions were explained, delimitations of this research were addressed, and the structure of the dissertation was outlined. With all the important areas of the research briefly introduced in this chapter, the following four chapters of this dissertation will present detailed description and findings of the research topic.

CHAPTER 2

LITERATURE REVIEW AND RESEARCH ISSUES

The previous chapter provided an overview of the dissertation and listed the objective, issues, and significance of the research topic.

This chapter reviews the relevant literature and comprises of six sections. The review starts with a discussion on early approaches to understanding a firm's performance and its competitive advantage. This is followed by the development of a theoretical framework and a discussion on contemporary approaches to competitive advantage. Next there is a discussion on supply chain management, followed by an overview of advanced supply chain management systems. The last two sections conclude with a discussion on gaps in the literature, identification of areas for further research, and the summary.

2.1 Early approaches to understanding a firm's performance and competitive advantage

One of the earliest (chronologically) approaches to competitive advantage is the microeconomic approach, or the idea of perfect competition (Walras, 1874, 1969). In perfect competition products are homogenous, consumers and producers have perfect information, prices will reach equilibrium, and as a result profits are negligible or low in the long run. However, according to Gill (1991), such a perfect economy is an abstraction, because there are monopolies, oligopolies, and perfect competition. Furthermore, there are also two kinds of competition: spatial and monopolistic. Spatial differentiation pertains to oligopolistic competition (Hotelling, 1929), and it meets consumer's different tastes. Monopolistic competition assumes that small firms produce a variety of differentiated products (Chamberlin, 1933; in Gill, 1991). All these situations allow for profit maximization and higher profits (Gill, 1991).

The industrial organization (IO) approach takes a richer approach to understanding a firm's successful performance. IO differs from the microeconomic approach by introducing variables that explain real-world economic behavior. In IO, there are two competing hypothesis that lead to higher profits and success - market power and a firm's efficiency (Scherer, 1990; Tirole, 1988). Nevertheless, the IO approach assumes that markets and firms will reach equilibrium, and in equilibrium profits differences will not exist (Tirole, 1988). Both the microeconomic approach and the industrial organization approach assume that all firms would reach equilibrium and have equal profit and success. However, we know from a daily look at many firms' performance on the stock market that profit and performance vary across firms, even when they are in the same business. Eaton and Lipsey (1978) have verified that differences in performance and profit exist between firms.

2.2 Contemporary approaches to achieving competitive advantage

2.2.1 Framework to understanding a firm's performance

One of the first researchers to propose a theoretical framework for understanding a firm's performance is Porter (1980). He takes a strategic and analytical approach to understanding competitive strategy, and argued that, “Every firm competing in an industry has a competitive strategy, whether explicit or implicit” (Porter, 1980, p. xiii). He proposes a framework for analyzing industries and competitors and describes three generic strategies - cost leadership, differentiation, and focus. He postulates that if a firm is able to do well in any of these strategies, it will gain competitive advantage. Porter's concept is illustrated in 2-1. Generic Competitive Strategies•Overall cost leadership•Differentiation•FocusCompetitive Advantageof a Firm

• Cost leadership requires efficient-scale facilities, pursuit of cost reductions, and cost minimization in all areas of the firm. This will give more profit.

• Differentiation of product or service requires industry-wide differentiation, including design and brand image, customer service, and distribution or dealer network. Product or service differentiation will help increase customer loyalty and ensure repurchase.

• Focus on markets, buyers, or product lines can maximize profits.

The framework, in 2-1, shows that the right strategies can provide competitive advantage. Porter (1985) also argues that competitive advantage come from the many discrete activities a firm performs in designing, producing, marketing, delivering, and supporting its product. Each of these activities contributes to a firm's relative cost position and creates a basis for differentiation. This is the value chain, and a firm has to disaggregate its strategically relevant activities in order to understand the behavior of costs and the existing and potential sources of differentiation. A firm gains competitive advantage by performing these strategically important activities cheaper or better than its competitors (Porter, 1985), and this can lead to a higher profit margin. The value chain concept is illustrated in 2-2.

Profit Margin

Outbound

Logistics

Manufacturing Operations, and other Internal

Processes

Inbound

Logistics

Procurement

Human Resource Management

Technology Development

Firm Infrastructure and Platform Services

Customer Service

Marketing and Sales

Primary

Activities

Support

Activities

Supply Chain Approach

Strategic

Planning

Approach

Marketing Capabilities Approach

The Value Chain and Theoretical Framework to Achieve Competitive Advantage

Adapted from Porter (1985) and this literature review.

Note 1: Key approaches to competitive advantage are highlighted with underlined

Characters

Note 2: The definition of supply chain implies all activities necessary to deliver a product (Hakanson, 1999). Therefore sales, marketing, and customer service activities can be construed as part of the supply chain approach shown in the . In this study, sales and marketing processes, such as demand management, order processing, and customer relationship management are included in the internal processes shown in the and in the supply chain literature review. However, sales and marketing activity, such as sales calls, advertising, product positioning, market research, and some post delivery support processes are excluded from supply chain activity. This is consistent with the approach taken by the Supply Chain Council and the SCOR (Supply Chain Operational Reference) model it uses to measure supply chain activity (Supply Chain Council, 2001).

2.2.2 Summary of contemporary approaches to competitive advantage

Porter's approach presents new thinking to competitive advantage (Rumelt, Schendel, and Teece, 1991) and has influenced other approaches to creating competitive advantage. Many of the other approaches to competitive advantage are summarized in Table 2-1. From the table, it can be seen that all the approaches to increasing competitive advantage, except for the early microeconomic and industrial organization approaches, fit the theoretical framework in 2-2. However, all these approaches to competitive advantage are complementary and not alternatives or conflicting theories - they basically propose various segments of the theoretical framework shown in 2-2.

The various approaches are discussed very briefly below, but the last approach (in Table 2-1), Supply Chain Management, is discussed in greater detail.

2.2.3 The strategic planning approach

In essence, Porter's (1980, 1985) approaches are strategic planning approaches, i.e. a firm's competitive advantage can be planned for. This includes planning for differentiation in the value chain, low cost leadership, and focus.

Nations can also be competitive (Porter, 1990). Nations need four conditions to gain competitive advantage and be successful. The four conditions are: factor conditions (education and skill levels), demand conditions (or market size), related and supporting industries, and company strategy and rivalry (Porter, 1990).

Strategy is “lucky foresight…Strategy is always the product of a complex and unexpected interplay between ideas, information, personalities, and desire...” according to Hamel (1998). What this implies is that one does not settle for obvious solutions and strategies but should look at alternatives, challenge assumptions, and look at new ways of delivering superior customer value and firm performance.

Table 2-1 Summary of early and contemporary approaches to competitive advantage

Approach

Proponent

Main idea/postulate

Comments

Microeconomic

Walras (1874, 1984)

Perfect competition results in negligible profits

Ideas ignore monopolies, oligopolies, and product differentiation. Profit does vary across firms according to Eaton and Lipsey (1978).

Industrial Organization

Scherer (1990),

Tirole (1988)

Success comes from market power and a firm's efficiency.

All proponents agree that in the long term there will be industry equilibrium and little profit.

Porter (1980) Porter (1985) Provides a framework for achieving competitive advantage.

Every firm has a generic competitive strategy in cost leadership, market focus, or differentiation.

The value chain disaggregates a firm into its strategically relevant activities. A firm gains competitive advantage by performing these important activities better than its competitors. Challenges the stereotype approach of perfect competition and industry equilibrium. Provides a prescriptive approach to achieve competitive advantage, but the ideas and solutions are essentially conceptual. Hamel (1998) Strategy is the product of a complex and unexpected interplay between ideas, information, personalities, and desire. A firm has to seek alternatives and new ways of delivering superior customer value and firm performance.

The Strategic Approach and its Variations

Value Chain Approach

Strategic Approach

Resource Based Approach

Wernerfelt (1984),

Barney (1991), Rumelt, Schendel, and Teece (1991).

A firm has to identify specific, or rare, resources that lead to higher profits. Long-term superior performance comes from building product market positions that effectively utilize and maintain these resources. Examples of such resources include customer loyalty, and technological leads.

If the resources are unique and difficult to duplicate, then the firm achieves competitive advantage.

Table 2-1 (Continued) Summary of early and contemporary approaches to

competitive advantage

Approach

Proponent

Main idea/postulate

Comments

Market Strategy

Marketing Capabilities Approach

Resource-Advantage Theory

Product Differentiation

Day (1994,1999), Cool and Dierickx (1989), Aaker (1989), Caves and Ghemawat (1986).

Also, Buzzell and Gale (1987), Jacobsen (1990), Erickson and Jacobson (1992), Boulding, Lee, and Staelin (1994).

Hamel and Prahalad (1990, 1998)

Hunt and Morgan (1995, 1996)

Trout (2000).

A firm's competitive advantage comes from two sources: Assets or resource endowments and distinct capabilities, which are the glue that holds these assets together. Examples are Honda's fuel-efficient engines, Wal-Mart's logistics systems. Day proposes a ‘market driven' organization, which will have a superior ability to understand, attract, and keep valuable customers

The concept of core competencies, or bundle of skills, that provides access to a wide variety of markets, provides customer benefits, and is difficult to imitate. An example is Federal Expresses' packaging, routing and delivery process

The firm's endowments are its resources, both tangible and intangible assets, which allow it to produce products that are perceived to have superior value.

The concept of tangible product differentiation, which the customer can appreciate - tangibles such as heritage (of product), product leadership, first mover advantage, and latest technology.

Assets and distinct capabilities provide competitive advantage and strong market position

The firm's profitability is determined by its relative costs and differentiation advantages in an industry

The right combination of resources will improve marketplace position and lead to competitive advantage and superior financial performance.

Only differentiation will provide competitive advantage

Supply Chain Management

Christopher (1998),

Poirier and Reiter (1999),

Tyndall et al. (1998)

This approach is a subset of the value chain approach and is focused on one section of the value chain. Refer to 2.2.

The management of internal, upstream, and downstream relationships with suppliers and customers will deliver superior value at lower cost.

Provides a prescriptive and detailed approach. The approach results in an efficient supply chain, which can deliver goods at lower costs, high efficiency, and maximum customer satisfaction.

Source: Developed for this study

Another approach from the strategy-based literature comes from Wernerfelt (1984). He proposes the Resource-Based approach for a firm. He analyzes the firm from the resource side rather than product or market power side. He has a 2-prong argument: A need for some specific resources that lead to higher profits and strong or rare resources, which can impose an entry barrier for other firms. Attractive resources that provide such barriers can be identified, implemented, and managed to make it difficult for others to catch up. Examples of resources include customer loyalty and production or technological leads. This is a prevalent theme throughout the literature - competitive advantage strategies cannot be bought they need to be developed. Barney (1991) and Rumelt, Schendel, and Teece (1991) also support this resource-based view.

2.2.4 Marketing strategy approach

The marketing capabilities approach introduces the concept of capabilities of a market-driven organization and explores the links between capabilities and a firm's performance and market success (Day, 1994, 1999). A firm's competitive advantage comes from two sources: Assets or resource endowments (image, quality perceptions, brand equity, etc.), which are acquired over time, and distinct capabilities, which are the glue that holds these assets together. Examples are Honda's fuel-efficient engines and Wal-Mart's logistics systems. Such capabilities provide competitive advantage resulting in better business performance (Day, 1994, 1999). Other proponents of the marketing capability approach are Cool and Derrick (1989), Aaker (1989), Caves and Ghemawat (1986), Buzzell and Gale (1987), Jacobsen (1990), Erickson and Jacobson (1992), and Bounding, Lee, and Staelin (1994).

The concept of core capabilities is not new and was proposed much earlier by Penrose (1959). However, this has been popularized as the concept of core competencies of the corporation that can lead to a firm's success by Hamel and Prahalad (1990). They actually propose some tests to measure the strength and success of core competencies - they must provide access to a wide variety of markets, they must provide customer benefits, and are difficult to imitate. An example is Federal Expresses' packaging, routing and delivery process. These researchers go on to argue (Hamel and Prahalad, 1998) that a firm's actual profitability is determined by its relative costs and differentiation advantages in an industry. This approach is almost identical to the theoretical framework for competitive advantage based on Porter (1980). Therefore it can be concluded that Porter's approach, postulated in 1980, is still valid in 1998.

The resource-advantage approach takes a similar vein as the marketing capabilities approach. The proponents (Hunt and Morgan, 1995, 1996) postulate that the firm's endowments are its resources, both tangible and intangible assets, which allow it to produce products that are perceived to have superior value. One of the resource-advantage examples quoted is the productivity, quality, and reliability of Japanese (Toyota) cars Vs General Motors cars. Hence, the right combination of resources will improve marketplace position and lead to competitive advantage and superior financial performance (Hunt and Morgan, 1995, 1996).

The product differentiation approach by Trout (2000) states that what matters is differentiation of product or service. Trout (2000) states that there are too many choices in today's world, and only differentiation provides competitive advantage.

Verification of marketing capabilities approach with the PIMS database.

Most theories mentioned in this review have not been tested empirically. However, there is literature that discusses cause and effect in the marketing environment. One of the arguments uses the Profit Impact of Marketing Strategies or PIMS database for its analysis and conclusions. The study by Buzzell and Gale (1987) looks at the affect of business and marketing strategies on the profitability of firms, and concludes that a firm's performance, measured by profits and ROI (Return On Investment) is driven by 3 factors: high market share, product quality, and low capital investments. This assertion is supported by Austin and Peters (1985), who argue that a firm can start with quality and then achieve lower costs, and hence higher profits. Later empirical research, using the PIMS database by Boulding, Lee, and Staelin (1994), also supports the assertion that differentiation (via advertising and sales force expenditures increase) can provide higher profits.

2.2.5 The advent of the supply chain approach

In the competitive environment of the 1990s, there has been a change in management thinking, resulting in a search for strategies that provide superior value. As a result, the supply chain approach to gaining competitive advantage has moved into the mainstream of business strategies. This approach has its roots from historical military campaigns (Britannica, 1994-1999) and more recently from Porter's (1985) value chain, with its emphasis on inbound and outbound logistics, and manufacturing operations. Kotler and Armstrong (1996), in a discussion on marketing logistics thinking argue that logistics (a key sub-set of supply chain management) has major impact on customer satisfaction, success, and costs. They recommend that a firm manage its entire supply chain and that such an approach will create competitive advantage and success.

2.3 Supply chain management categories and factors

2.3.1 A historical perspective of supply chain management

Before the term supply chain was coined, the term used for management and movement of product and services was logistics. The development of logistics was originally undertaken by the military in ancient times (Britannica, 1994-1999). For example, the Roman legions used a flexible system consisting of supplies, storage depots, and magazines stocked with supplies and arms, superb road systems, mobile repair shops, service corps of engineers and armourers, and extensive coordination and planning. This resulted in an efficient, fast, and formidable army that won many battles and conquered much of Europe and Asia, and held it for many hundreds of years (Britannica, 1994-1999). The vast Roman Empire finally declined, not because it lost control of its empire due to poor logistics, but because of moral decay and despotism (Durant, 1944).

2.3.2 Definition of supply chain and supply chain management

It will be useful to look at some definitions of supply chain and supply chain management:

• Supply chain is all inter-linked resources and activities needed to create and deliver products and services to customers (Hakanson, 1999, p. 254).

• Supply chain management goes further and includes managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, distribution across all channels, and delivery to the customer (Supply Chain Council, 2001).

• A more eloquent definition of Supply Chain Management is a network of relationships, with the goal to deliver superior value, i.e., “The management of upstream and downstream relationships with suppliers and customers to deliver superior value (in manufacturing products and services) at less cost to the supply chain as a whole” (Christopher, 1998).

2.3.3 Key categories the Supply Chain Management System

While the value chain and marketing approaches propose generic ideas and capabilities, proponents of the supply chain approach go a step further and identify specific activities, backed by detailed processes that can improve a firm's competitive advantage and success. Supply chain management encompasses end-to-end management of a product or service, and includes the items shown below in 2-3. Note that when all the supply chain categories are linked together they form The Supply Chain Management System.

2. Planning:

Demand forecasting, demand generation, and sales and manufacturing planning

1. Outbound Logistics

4. Inventory management

Vendors

Customers

1. Inbound Logistics

6. Order and information

management of products and services

3. Purchasing,

strategic sourcing, and

vendor management

7. The Internet-enabled schain and integrating of the entire supply chain

upply

8. SCM Information

Systems

10. Metrics and

tools to monitor,

manage, and improve

Performance

5. Manufacturing and mass customization of products

9. Customer

Relationship

Management

Key categories of the supply chain: Together they form the Supply

Chain Management System

Note: The factors include physical activities, transactions, information systems, and tools

Source: Adapted and compiled from: Al-Hakim (2002), Anderson and Lee (1999), Britannica (1994-1999), Banfield (1999), Bradshaw and Bash (2001), Christopher (1998), Coyle, Bardi, and Langley (1998), Galbreath and Rogers (1999), Poirier (1999), Poirier and Reiter (1999), Poirier and Bauer (2000), Riggs and Robbins (1998), Tyndall el al. (1998).

A summary of the supply chain categories and factors and their benefits is given below in Table 2-2, and a detailed discussion of each element is given in detail in the next section.

Table 2.2 Supply Chain Categories, Factors, and their Benefits

Categories

Factors

Benefit

1

Logistics

(Transportation only)

• Inbound transportation into company

• Outbound transportation to customers

• Company wide logistics coordination and management

• Reverse logistics

• Lower costs

• Faster deliveries of parts and products

• Customer satisfaction

2

Planning

• Collaborative planning

• Demand generation (of products)

• Provides better forecast process, resulting in less inventory, stable manufacturing, and less stock-outs

3

Purchasing

• Strategic sourcing and centralized purchasing

• Consolidate and reduce number of suppliers

• Collaborative bidding

• Lowers costs of purchased parts and cost reduction

4

Inventory management

• Inventory management and reduction

• Reduces inventory, assets, and better availability

5

Manufacturing techniques and mass customization

• Lean manufacturing

• Late product differentiation and customization

• Outsourcing of non-core activities

• Lean inventories and minimum waste in production

• Reduces number of product options and better availability

• Increases productivity via lower costs

6

Order management

• Electronic order management, with electronic transactions and payments

• Increases speed of order transactions, with better and quicker information to customers

22

Table 2.2 (Continued) Supply Chain Categories, Factors, and their Benefits

Categories

Factors

Benefit

The Internet enabled supply chain and integration of the entire supply chain

• SCM systems to link the supply chain

• Efficient Consumer Response (ECR)

• Internet as the basic engine for e-commerce

• Inter-organizational level coordination

• Rebuilding, or disinter-mediation, of the supply chain

• End-to-end visibility of the supply chain, with faster transactions, lower costs and inventory, higher customer satisfaction

• Reduction of cash to cash cycle

• Enables Electronic product information and pricing, faster customer and supplier and financial transactions, real time order management, and electronic delivery of products and services

• Optimization of supply chain

• Shorter and more efficient supply chain

8

SCM Information Systems

• Supply Chain Management information systems

• Customers access into a firm's supply chain

• Faster information flow internally and with customers and suppliers

• Increased customer satisfaction

9

Customer Relationship Management (CRM)

• Management of technology, processes, information, and people (to get a 360-degree view of the customer)

• Higher customer satisfaction and loyalty

10

Metrics and tools to manage and improve performance

• Metrics to track key factors of supply chain performance

• SCOR (Supply Chain Operations Reference) model

• Competitive benchmarking process

• Computer modeling for SCM optimization

• Better monitoring and management of performance

• --As above--

• Adoption of best practices

• Lower supply chain costs

Source: Summary from Literature Review, adapted and compiled from: Al-Hakim (2002), Anderson and Lee (1999), Bakos, (1991), Britannica (1994-1999), Banfield (1999), Barret and Oliveira (2001), Bradshaw and Bash (2001), Christopher (1998), Coyle, Bardi, and Langley (1998), Galbreath and Rogers (1999), Handfield and Nichols (1999), Poirier (1999), Poirier and Reiter (1999), Poirier and Bauer (2000), Riggs and Robbins (1998), Tibben-Lembke (2002), Tyndall et al. (1998).

2.3.4 Applications of supply chain management factors

1. Inbound and outbound logistics

All parts and products within the supply chain have to be delivered to factories, distributors, and customers. The choice of the transport mode (air, sea, or land) affects all other areas of supply chain management, such as warehousing, production, packaging, planning, location (of suppliers, manufacturing, and customers), inventory control, and information management (Coyle, Bardi, Langley, 1998). Therefore factors such as transit time, reliability, accessibility, security, impact on inventory, product degradation or obsolescence, trace-ability, and so on are important. Once the carrier is selected, computer models are used to optimize routing. The overall effectiveness of the shipping function is a major way to reduce costs (Britannica, 1994-1999; Council Of Logistics Management, 2001; Coyle, Bardi, Langley, 1998).

More recently, managing the reverse flow of products has become an important ability. Reverse Logistics is the management of the reverse flow of products. This includes customer dissatisfaction with the product or at the end of the product life cycle, when the product is returned for recycling. This concept of reverse logistics has become an important strategic advantage for companies, and is driven by losses from customer dissatisfaction returns, or the cost and challenges of recycling (Tibben-Lembke, 2002). Both activities if managed well can increase customer satisfaction.

2. Planning: Sales and production planning: collaborative planning and generating demand

All manufacturing or supply of services starts with a forecast of demand. The problem is that forecast errors can result in lost business (if forecast is low) or high inventories (if forecast is too high). Forecast errors lead to the ”bullwhip” effect and can cause excessive inventories, poor customer service, lost revenues, misguided capacity plans, and missed production schedules (Lee, Padmanabhan, and Whang, 1997). Furthermore suppliers often push products to market, but more recently the retailers are interested in stocking only what the consumer will buy.

The solution to the “bullwhip” effect is supply chain collaboration - an activity requiring two or more companies to share the responsibility of exchanging common planning, management, execution, and performance measurement information (Anthony, 2000). Such a collaborative relationship transforms how information is shared between companies and drives change to the underlying business processes. Typically, the process is to get data from POS (point of sales) systems, which is sent back to the warehouse or manufacturer, who arranges for quick replenishment (Lee, Padmanabhan, and Whang, 1997; Poirier, 1999; Poirier and Reiter, 1999). Consequently, production volumes and subsequent sales to retailers are based on sell-through information, planned promotions, and seasonal forecasts using statistical models. The sell-through data are used to replenish products at a retailer through a process called continuous replenishment. Hence, if a firm has the ability to understand real-time market demand and respond quickly it is possible to manufacture only what sells in the market (Lee, Padmanabhan, and Whang, 1997). This continuous replenishment process, or the synchronized supply chain as it is often called, has spread from the supermarket sector to the automobile industry, but barriers remain including lack of scalability and critical mass, managing exceptions, and managing promotions (Barret and Oliveira, 2001).

3. Purchasing, strategic sourcing, vendor management, collaboration and bidding via the supply chain

With accurate dynamic forecasts made from customer demand and promotions, the correct raw material inventory can be stocked. Furthermore, purchasing becomes a strategic function - hence strategic sourcing is initiated to reorganize the company's supply base for materials and services in order to reduce external expenditures and internal processing costs (Banfield, 1999). Aggressive companies have partnered with suppliers to reduce the number of suppliers by 40 % to 85% (Banfield, 1999; Poirier and Reiter, 1999). This supplier reduction program also reduces internal processing costs as larger orders go to fewer suppliers. In addition, aggressive companies review their supplier's cost structure and technical capabilities in order to select the best supplier. They also set up internal supply management teams to manage the supply process (Riggs and Robbins, 1998). These initiatives result in higher volumes with better prices and quality from the short-listed suppliers (Banfield, 1999; Riggs and Robbins, 1998).

Costs can be reduced through industry collaboration and bidding via the supply chain. For example, increasing political pressure to cut defense budgets in the late 1990s and early 2000 has caused a major restructuring of the defense industry and led to consolidation, mergers, acquisitions, and strategic alliances. This has led to extensive collaboration between defense firms, and included collaborative bidding (Graham, Hardakar, and Sharp, 2001). Research into the collaborative bidding process has shown that bidders use Porter's (1980, 1985) competitive approach, and attempt to position themselves as a low cost or differentiated (value added) supplier.

4. Inventory Management

There was a strong emphasis on asset management via lower inventories and warehouse space. Companies recognize that product inventories are expensive to hold. Therefore many companies have implemented just-in-time (JIT) deliveries of parts, a methodology initially implemented by Toyota Motor Company ( Shingo, 1981). Some companies have been more aggressive and have implemented vendor-managed inventory (VMI). For example Apple Computer Inc. has set up a partnering deal with suppliers. A supplier keeps inventory in the warehouse on consignment and moves it to the factory on demand - only then is it considered sold (Bleakley, 1995).

Moreover, inventory occupies warehouse space, which is costly - therefore there is a drive to reduce multiple warehouses. Hence, regional distribution centers (RDCs), instead of a warehouse in every big city, have become popular (Coyle, Bardi, and Langley, 1998). For example, Philips has reduced its warehouses for consumer products from 22 to 4 in Europe (Christopher, 1998). The RDCs are typically located within or near major markets. This can often result in longer delivery cycles, but can be compensated with supply chain programs like continuous replenishment. The next step is to manage inventory by a centralized information system, to facilitate shipping across and within regions. The information systems are critical in providing availability information and create a virtual inventory that is accessible to all involved parties (Poirier, 1999).

5. Manufacturing techniques, mass customization of products, and outsourcing

Japanese companies led by the automobile industry have implemented lean manufacturing techniques. For example kanban manufacturing and just in time (JIT) delivery of parts. (Note: Kanban is a system that emphasizes manufacturing in small lots with minimum inventory build-up in the production process). This results in lower inventories, better deliveries, and lower costs compared to US (automobile) competitors (Liker and Wu, 2000). Another activity to lower costs is outsourcing of manufacturing and manufacturing closer to the customers and large markets. The reason for this is that in every industry customers are expecting greater customization of products and services to meet their individual needs (Anderson and Lee, 1999; Schonfeld, 1998). To meet these needs, companies are pursuing a supply chain compression strategy (Anderson and Lee, 1999). Some of the strategies pursued by companies are: (adapted from Anderson and Lee, 1999; Bagozzi, et al., 1998; Rockford, Lee, and Hall, 1998; Feitzinger and Lee, 1997):

• Intra-company postponement: moving final product configuration from factory to distribution centers in selected markets. This solution requires a modular product design, which allows last minute customization, to meet customer, at a distribution center near the customer. The Hewlett-Packard Company pioneered this program from 1992 onwards. Note: the term postponement is the last stage of manufacturing, which was postponed until the last possible moment.

• Inter-company postponement, i.e. moving final product configuration downstream to a channel partner, intermediary, or retailer

• Sales agent model: moving all inventory to the assembler, and allowing the channel and reseller to focus on sales.

• Direct model: the assembler is responsible for order processing and delivery, thereby eliminating the distributor and reseller, and sales channel.

• Outsourcing: companies are realizing that manufacturing (especially of low-value added activity) is not a core competency. Outsourcing of such activity can reduce costs and increase productivity per employee.

Any one of these strategies is able to save costs and improve return on investment. Depending on which strategy is used, some companies have shown an increase in EVA (Economic Value Added) of 70 to 470 million dollars (Anderson and Lee, 1999).

6. Order and information management of products and services

Since 1995, many companies have started to convey information, transmit orders, and purchase parts and products via Electronic Data Interchange (EDI) or the Internet (Poirier and Reiter, 1999). EDI has been available for many years, but is limited to big producers and is too costly for small manufacturers or retailers (Kerstetter, 2001). However with the advent of the Internet, almost any firm is able to become an electronic commerce player. Activities provided via the Internet include inventory information, catalogs and prices, order management, shipping information, and product-returns management (Sedlak, 2001). The benefits of electronic commerce to a firm include quicker and more accurate capture of orders, quicker verification and transmission of orders, better communications, and quicker payments.

7. The Internet enabled supply chain and integration of the entire supply chain

The disparate factors of the supply chain (such as planning, purchasing, manufacturing, order and management, warehouse management, and logistics) have resulted in a formidable challenge because many activities were adopted and introduced ad-hoc in a company. However, with the advent of more powerful information technology systems, many solutions towards better integration have been introduced:

Integrating the entire supply chain via a computer network: The separate factors of the supply chain grew and evolved over the years. These factors have to be linked together to ensure optimization of resources and costs. As a result, software vendors have come up with solutions to provide this synergy, synchronization, and optimization of the supply chain. In 1999, there were at least 14 enterprise-wide (supply chain) software solutions available (Shepherd and Lapide, 1999). The linkages span the supply chain from the consumer to the supplier. Good integration involves coordination of the following: demand information, inventory status, capacity plans, production schedules, promotion plans, demand forecasts, shipment schedules and replenishment processes (Lee, 2000). The benefit of integration is the creation of supply chain that reads customer demand and responds quickly to customer and market needs. Such a lean and responsive system is, in theory, able to shorten time to do anything and have a shorter cash to cash cycle (Poirier, 1999; Tyndall et al. 1998). Note: The cash to cash cycle is the time taken to convert an order into cash and is a key measure of financial performance - refer to 2.2.

With SCM integration it is possible to improve inter-organizational level coordination and hence move towards optimization of the supply chain (Bakos, 1991).

Successful integration via Efficient Consumer Response (ECR) process: One of the most effective integration solutions is Efficient Consumer Response (ECR) - it enables the integration of factory or vendor supply and customer demand. Specifically, it focuses on demand management, supply management, and enabling technologies that links these activities (Christopher, 1998; Poirier and Reiter, 1999). ECR can coordinate new product introductions, consumer promotions, product range/variety, and replenishment. This is the standard in large grocery chains in the US and Europe and is moving into department and other retail outlets (Poirier and Reiter, 1999). The benefit of ECR is lower cost, less inventory, and improved product availability (Christopher, 1998; Poirier and Reiter, 1999). ECR can result in extensive collaboration between suppliers, logistics service providers, and retailers. Hence, supply chains can become demand chains, resulting in the optimum quantity of products in the market, with little or no stock-outs in the retail outlets.

Rebuilding the supply chain: The convergence of the Supply Chain with the Internet has resulted in a rebuilding of the supply chain. The Internet makes it possible to dispense with many activities in the supply chain (The Economist, 2000a). This dis- intermediation has reduced the role of many wholesalers and retailers as consumers have started to buy direct from manufacturers or wholesalers. However, early predictions that this dis-intermediation will eliminate wholesalers and retailers has not happened - instead what has emerged is a change in the function of intermediaries, for example the need to add value and decrease high price mark-ups (Hagel and Singer, 1999).

The Internet-enabled supply chain: Further coordination and integration of the factors of supply chain is possible with the advent of the Internet. Several visionaries and researchers have made predictions on how the Internet will impact the supply chain. The Internet provides the basic engine to initiate, propagate, support e-commerce, and synchronize the entire supply chain. In the future, with e-commerce and the Internet, companies will sell only what they can deliver. This will put a high dependency on supply chain management (Drucker, 2000). Some of the activities that are possible via the Internet are (Christopher, 1998; Hagel and Singer, 1999; Johnson, 2000; The Economist, 2000a; Tyndall et al. 1998.):

• Product and marketing information, catalogues, and pricing data.

• Customer communication, order management, acknowledgement, and service.

• Supplier communication, data interchange, and purchase orders

• Financial transactions between the firm and its suppliers and customers

• Electronic delivery of products and services (discussed below)

• Rebuilding the supply chain

However, the Internet is only a tool to better synchronize and facilitate supply chain management and cannot replace it - the outcome will be lower costs, higher speed, and increased customer satisfaction (Anderson and Lee, 2000).

The E-supply chain: The Internet enabled supply chain becomes an E (or Electronic) supply chain. The E-supply chain connects the entire organization from raw material vendors, purchasing, planning, manufacturing, logistics, marketing, customer care and service, and human resources. Such a system is able to meet the customer's changing demand quickly able and meet very aggressive goals in economic added value, EVA, (Poirier and Bauer, 2000). The E-supply chain forms a network, which, allows for collaboration with all the partners of a firm and links all the important information in a firm, including cash flow and order management, to those members of the supply chain that most need it. The greatest challenge is good information exchange and better integration to create a truly virtual E-supply chain. If this is achieved, the result will be lower costs and enhanced performance (Van Hoek, 2001). Nevertheless, the E-supply chain dimension of E-business is largely neglected and under-practiced, and hence it is difficult to make E-business into a reality. In fact one researcher argues that the E-supply chain is virtually non-existing (Van Hoek, 2001).

Electronic delivery of products and services: The convergence of the Supply Chain with the Internet allows immediate delivery of


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