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This chapter reviews the relevant literature and starts with discussion on Adding Value in supply chain management with special focus on pharmaceutical industry and to understanding firm's supply chain management and competitive advantages. With involved four major points those are Challenges, Collaboration and Planning High performance delivery, Integration & Implementation. Following there is a discussion on theoretical framework on supply chain management, role of top management and overview of latest supply chain management systems. In the last this chapter conclude with summary.
2.1 Adding Value in supply chain management:
First question arise that what is Value adding in supply chain? Base on literature review value adding is "the difference between input cost and output value" (Hines, 2004, p.224). Value added along supply chain takes the form of tangible goods added and intangible services supplied (Hines, 2004). Value added notify to any additional value created at a particular stage of service by key service factors including; tangible value added through material transformation, labour and captical goods and intangible value added through capital and building of collaborative relationships. Firms can add value in many ways, like improve supply method from current level to higher level which is also part of add value in supply chain. Value adding resources within a supply chain are the tangible (processes). Intangible capabilities of a firm (firm attributes, firm controlled information, knowledge and collaborative relationships) enhance efficiency and effectiveness (Cunningham, 1995).
By reviewing literature, the value chain concept was developed and popularized in 1985 by Michael Porter in Competitive Advantage. Porter defined value as the amount buyers or customers are willing to pay for what a firm provides, and he visualized the value chain as the arrangement of nine basic values to customers. Porter linked up the value chains between firms to form what he mentioned a value system; now in present era of globalisation and collaboration the link between two firms' creating value process called the "value chain." As value chain name involves the interpedently processes that generate value of products and the resulting demand and funds flows that are created. According to the Martin Christopher value chain activities can be categorized into two types primary activities (Inbound logistics, operations, outbound logistics, marketing and sales and services) and support activities (Infrastructure, human resource management, technology development and procurement) (Christopher, 2005).
From the literature review, author suggests that first, we need to understand the physical resources that are required within a supply chain to create and deliver a finished service to a customer. Second, we must understand the exchange relationship between particular supply chain resources and the flow of revenue in the value chain. Third, we must also understand what it is about the ownership and control of particular supply chain resources that allows certain resources to command more of the flow of value than others. In understanding this, the process of analytically mapping the properties of power within supply and value chains can commence. To deliver a value, product category and availability is also play important role in supply chain management. By reviewing literature, author understand that alternative perspective of viewing supply chains as value chains identifies economic value as being added through coordinated management of the flow of physical goods and information at each stage of the chain (Davis & Stewart, 2004). The theoretical basis for supply chains, Handfield and Nichol (2002, p8), define them as including "all organisation and activities associated with the flow and transformation of goods from the materials stage, through to the end user, as well as the associated information flows" Information sharing is identified as a key driver for improving supply chain performance and enhancing competitive advantage (Zhang, 2006). Additionally supply chains can be characterised as value system and are defined as "a connected series of organisations, resources and knowledge streams involved in the creation and delivery of value to the end customer"(Handfield & Nichols, 2002, P11).
2.1.2 Company's supply chain management and competitive advantage:
Definition of supply chain is the network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services delivered to the ultimate consumer (Christopher 1992). In other words, a supply chain consists of multiple firms, both upstream (i.e., supply) and downstream (i.e., distribution), and the ultimate consumer (John T. Mentzer, 2001).
The philosophy behind supply-chain management has changed. Previously the central concept was to manage an inventory that acted as a buffer between a limited production capacity and variable customer demands. The scope of the task was interpreted as managing warehouses and transport operations. The current priority is to engineer the supply chain as a seamless whole, breaking down the barriers that have existed between purchasing, production, distribution and sales. These issues are particularly relevant to the pharmaceutical industry. Functions have traditionally operated independently and there has been a consequent sub optimization of the supply chain by fragmenting it along functional lines. In its new form, supply-chain management is a corporate-level task on which several strategic objectives depend, not least ensuring a satisfactory return on capital employed while ensuring the supply of goods and services to designated markets at the service levels demanded. To achieve this, even at a national level, using local facilities to supply local markets is a challenge, requiring close integration of the supply chain and subjugation of functional/ departmental objectives to the needs of the supply chain as a whole. To achieve it globally is much more difficult (Booth, 1996).
2.1.3 Contemporary approaches to achieve competitive advantage:
One of the first ideas about theoretical framework for understanding firm's performance is Porter (1980). He introduces a strategic and analytical approach to understanding competitive strategy, and said that "Every firm competing in an industry has a competitive strategy, whether open or hidden (Porter, 1980). He proposes a framework for analysis 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 strategic fields, It will gain competitive advantage. Porter's concept is portraying in below figure.
Competitive Advantage of a Firm
Generic Competitive strategies
Overall cost leadership
Figure: 2-1: Strategies to achieve competitive advantage: source Porter (1980).
-Cost Leadership is most important in competitive pharmaceutical distribution chain, efficient-scale facilities, pursuit of cost reductions, and cost minimization in all areas of the firm. This action can increase company's profit.
-Differentiation of product like, different one medicine in different brand (Ports and Blister pack) or service differentiation including design and brand image, customer service, and distribution or dealer network. This action can help increase customer loyalty and ensure often purchase.
-Focus on markets, buyers or product line (new line of medicine with its generics version) can help to achieve competitive advantage.
The framework of Porter, in fig 2-1 shows, that the proficient strategies can provide competitive advantage. Porter (1980) also argues that competitive advantage comes from the many separate activities a firm achieve in designing, storage, marketing, delivering and creating owns products. Each of this processing contributes to a firm's relative cost to position and creates a basis for differentiation. This is the Pharmaceutical logistic value chain, and a firm has to recollection its strategically relevant activities in order to understand the behaviour of costs and the existing and potential sources of differentiation. A company gains competitive advantage by performing these strategically important activities better than its competitors (Porter, 1985). The general value chain concept, and Sigma's existing concept is illustrated in figure 2-2.
Supply chain advance Marketing Leadership Advance
Inbound Sigma House Picking and Customer Marketing &
Logistics (Warehouse) Assembling Service Tele-sales
Human Resource Management
Technology & service Development
Firm (Sigma's) Infrastructure and Platform Services
Figure 2-2: The value chain and Theoretical Framework to achieve competitive Advantage (Adapted from Porter 1985).
The definition of supply chain including all basic activities, therefore sales, marketing and customer service activities can be construed as part of the supply chain approach show in the above figure. In company, Tele-sales and marketing processes, such as demand management, order processing and customer relationship building management are included in the internal processes shown in the figure and in the supply chain literature review. However, sales and marketing activity, such as sales calls, advertising and some post delivery support processes are excluded from supply chain activity. This is consistent with the approach taken by the supply chain model it uses to measure supply chain activity (Supply chain council, 2007). There is various types of approaches to achieve competitive advantage, strategic approach,
2.1.4 The strategic Planning approach:
In important of porter (1980) approaches, a strategic planning approach that is company's competitive advantage can be planned for this. This includes planning for differentiation in the delivering a value in supply chain, low cost leadership and focus. Strategy is always the product of a complex and unexpected interplay between basic information, personalities and aspiration according to Hamel (1998). What this implies is that one does not gain for obvious solution and strategies but should look at alternatives, challenge assumptions, and look at new ways of delivering superior customer value and firm performance.
2.1.5 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, 1999). A firm's competitive advantage comes from two sources: Assets or resources, which are acquired over time and distinct capabilities, which are the glue that holds these assets together. Examples are DHL's secure delivery across the globe and Walmart's logistic systems. Such capabilities provide competitive advantage and help organization to deliver a value to its every customer. Other Proponents of the marketing capability approach are cool and Derrick (1989), Aaker (1989), caves and Gale (1987). The concept of capabilities is not new and was proposed much earlier by penrose in 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 in 1990. They actually propose some tests to measure the strength and success of core competencies. An example of Federal expresses its packaging and delivery process. The product differentiation approach by Trout (2000), states that what matters is differentiation of product or service, that are too many choice in today's world, and only differentiation provides competitive advantage. In Pharmaceutical business there many manufacture produce a medicine under different choice, keeping all different sort of product and supplying on time will be better advantage over the competitive.
2.1.6 The Introduction of the supply chain approach:
In the competitive market of the early decade, there has been a change in management action, resulting for searching strategies that provide superior value to customers. As a result in the supply chain approach to gaining competitive advantage has moved into the frontline of business strategies, especially in developed countries. This approach has its introduced from historical military campaigns (Britannica, 1999) and recently from porter of value chain, with its importance on inbound and outbound logistics, and production operation. In a discussion on marketing logistics thinking argue that logistics 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 add value in existing supply chain within the organization and will help to gain competitive advantage over rival.
2.2 Supply chain Management and factors:
2.2.1 Definition of supply chain and management:
It will be helpful to go through some basic definitions of supply chain and management:
- Supply chain is all inter linked resources and activities needed to create and deliver products and service to customers (Hakanson, 1999).
- Supply chain management goes advance and including managing supply and demand, resourcing, assembling and packing, distribution across the globe and delivery to the every customer (Supply chain council, 2009).
- A more on supply chain management is a network of relationships, with the goal to deliver superior value, the management of upper level and lower level relationships with suppliers and customers to deliver best value in services at effective cost to the supply chain as a whole (Christopher, 1998). This definition is a key part of this dissertation in terms of gaining competitive advantage or delivering best value to sigma pharmaceutical customers.
2.2.2 Key areas of Supply chain management system:
References Literature Review
1. Christopher, M. (2005). Logistic and supply chain managment. London: FT prentice Hall.
2. Handfield, R. B. & Nichols, E. L. (2002) Supply Chain Redesign: Transforming Supply Chains into Integrated Value systems, U.S.A: Prentice Hall.
3. Zhang, C. (2006). Secure Information sharing in Internet-based supply chain management systerms. Coumputer Information Systems , 18-24.