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Many business organizations are creating a competitive advantage through supply chain management. The end result of best practice supply chain management is better customer service. They are able to create a competitive advantage because supply chain management is a complex area of business that is: unique to each business and hard to duplicate. It is rare in today's business because of its complexity and requires communication through the firm and with its suppliers. The best supply chains have communication within the individual firms and between the companies in the supply chain. This paper will focus on a few companies who have used their best practices to develop a benchmark in their industry, these companies include: Wal-Mart and Zara. To determine the best supply chain for your company you must first define the type of products you supply, functional or innovative.
Collaboration is one of the most important aspects of a successful supply chain because it can ultimately lower costs through more accurate information. Many companies hesitate to communicate internal information to their suppliers, this only increases the costs for all parties involved. By sharing information the supply chain will have more accurate centralized forecasts, this reduces the "Bullwhip Effect". The "Bullwhip Effect" is when everyone who orders materials builds in a buffer to protect themselves from being out of stock. Because of this buffer everyone's costs are increased; if there is a centralized forecast there will only be one buffer built in preventing the extra costs of purchasing unneeded materials, inventory holding costs, and market mediations costs. Market mediation costs are the loss of revenue due to materials being damaged, lost, stolen, or marked down to liquidate unnecessary assets. When firms share information it also benefits the supply chain by having more ideas how to cut costs. Suppose a firm is developing a new product, it would be beneficial to have representatives from their suppliers to provide input on product specifications. With the input of suppliers the product specifications can be altered to be better, faster to produce, or cheaper to produce. Just-in-Time supply chains are the best practice in supply chain management because it lowers inventory levels, lead time, and order cycle time.
The demand for functional products is generally predictable and the profit margins on the products are low. Companies with functional products should focus on lean supply chains with continuous replenishment. The purpose of lean supply chains is to minimize inventory and lower operational costs. Just-in-Time, JIT, supply chains are the best practice for functional products because demand is predictable and it lowers inventory levels. JIT supply chains require companies to share information and need a centralized forecast. They focus on
Companies with functional products generally have a predictable demand and low profit margins. These companies should focus on lean supply chains with continuous replenishment. The focus of lean supply chains is to minimize inventory of components and work-in-progress and work towards a just in time environment whenever possible. Forecasts should be centralized, economic batch quantities because demand is stable, maximum efficiency to preserve low margins. Demand is supported by deploying inventory in anticipation of projected sales levels and location. Focus is on managing demand and lead time variance to reduce waste. Pull system, minimal inventory,
Wal-Mart is the largest company in the world and operates the best supply chain for functional products. Since Wal-Mart has such an efficient supply chain they are able to provide the end consumer with its "Everyday Low Price Strategy", this is Wal-Mart's benchmark (Bergdahl 2008). They are able to provide the lowest possible prices through continuous operational innovations; the most notable innovation was cross-docking. Cross-docking is the practice of moving the goods from suppliers' trucks across the distribution center into the retail delivery trucks without storing the inventory. This practice eliminates storage at the distribution center and lowers the cost of holding inventory (Hammer 2004). Wal-Mart is able to provide their customers with such low prices by cutting every possible supply chain cost they can. Their 2007 annual sales were $350 billion with a profit margin of only 3.2% (Bergdahl 2008). Communication
Agility- the ability to respond rapidly to meet the precise needs of often unpredictable demand is key. Should be demand driven, localized configurations (postponement), maximize effectiveness to preserve high margins. Reduce uncertainty by managing demand and order cycle time varience. Minimal inventory because holding costs are high and the risk of market mediation costs are higher with innovative products.
Companies with innovative products generally have unpredictable demand and high profit margins. Re These companies should focus on responsive supply chains with expedited shipping. Zara has developed a benchmark in the fashion industry by having a "superresponsive supply chain". Zara has the ability to design a new piece of clothing and have it on the store shelves in only fifteen days. This is a rare ability in the fashion industry where most companies take months in advance to plan for the next line of clothing. Zara's practice allows them to collect full ticket price on 85% of their products whereas the industry average is 60%-70%. They also perform about half of their own production rather than outsourcing it similar to the practices of their competitors who focus on economies of scale. Zara's practices are best categorized as economies of scope, the produce and distribute clothes in small batches and hold their retail stores to high standards of ordering and receiving products. One of the most unusual practices Zara has is that they tolerate and even encourage stock-outs; this is a practice that is unheard of in practically every business. Zara is able to execute their business efficiently because of three principles they built into their operations, these principle include: communication, synchronicity, and flexibility.
If someone else can do it better and or cheaper you should outsource that activity, if you can do it best keep it in house.
Best practices of supply chain management are so rare because companies are not willing to do what it takes to develop better supply chains. Developing the best practices in a supply chain requires everyone to work together and communicate. Operational innovations are rare because supply chain management is not a glamorous department of business. Executives don't want to be bothered with operational innovations because they don't get noticed by the media or share holders, however it will increase profit margins which share holders notice.