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Linking Competitive Strategy to the Value Chain

Historically, supply chain and operations management functions were viewed primarily as cost centers to be controlled. In recent years, it has become clear that these functions can be used to gain a competitive advantage that helps the top line as well. An organization should establish competitive priorities that its supply chain must have in order to satisfy internal and external customers. It should then link the selected competitive priorities to its supply chain and operations management processes.

Krajewski et al. suggest breaking an organization’s competitive priorities into cost, quality, time, and flexibility capability groups (see Figure 1.1) [Krajewski, 2013]:

Figure 1.1

Figure 1.1 Competitive Priorities

  • Cost strategy—This strategy focuses on delivering a product or service to the customer at the lowest possible cost without sacrificing quality. Walmart has been the low-cost leader in retail by operating an efficient supply chain.

  • Time strategy—A time strategy can focus on speed of delivery, response time, and consistency or even product development time. Dell has been a prime example of a manufacturer that has excelled at response time by assembling, testing, and shipping computers in as little as a few days. FedEx is known for fast, on-time deliveries of small packages.

  • Quality strategy—Consistent, high-quality goods or services require a reliable, safe supply chain to deliver on this promise. If Sony had an inferior supply chain with high damage levels, it wouldn’t matter to the customer that the company’s electronics are of the highest quality.

  • Flexibility strategy—This strategy can focus on priorities such as volume, variety, or customization. Many of today’s e-commerce businesses, such as Amazon, offer a great deal of flexibility in many of these categories.

Many organizations focus on more than one of these strategies, and even those that focus on only one of them must offer reasonable performance in the others (though perhaps not “best in class” performance).

The goal for today’s supply chain is integration through collaboration to achieve visibility downstream, toward the customer, and upstream, to suppliers. In a way, many of today’s companies have been able to “substitute information for inventory” to achieve efficiencies. The days of having “islands of automation” or having an internally focused internal system that may optimize one organization’s supply chain at the cost of someone else’s (such as a supplier’s or customer’s) are over.

The Lean philosophy involves teamwork and critical thinking aided by the right technology to enable organizations to work with other functions internally as well as with other members of the external supply chain, including customers, suppliers, and partners. The organization can then achieve new levels of efficiency and use its supply chain to achieve a competitive advantage by focusing on adding value to the customer as opposed to just being a cost center within the organization.

The Value Chain model, originated by Michael Porter (which today is more like a “Value Web,” as each businesses’ chain intersects with other chains), shows the value-creating activities of an organization. As you can see in Figure 1.2, it relies heavily on supply chain functions.

Figure 1.2

Figure 1.2 Value Chain Model

In a value chain, each of a firm’s internal activities, listed below, adds incremental value to the final product or service by transforming inputs to outputs:

  • Inbound logistics—Activities including receiving, warehousing, and inventory control of input materials

  • Operations—Activities related to transforming inputs into the final product or service to create value

  • Outbound logistics—Actions that get the final product to the customer, including warehousing and order fulfillment

  • Marketing and sales—Activities related to buyers purchasing the product, including advertising, pricing, distribution channel selection, and the like

  • Service—Activities that maintain and improve a product’s value, including customer support, repair, warranty service, and the like

Porter also identifies support activities that can add value to an organization:

  • Procurement—Purchasing raw materials and other inputs that are used in value-creating activities

  • Technology development—Research and development, process automation, and similar activities that support value chain activities

  • Human resource management—Recruiting, training, development, and compensation of employees

  • Firm infrastructure—Finance, legal, quality control, and so on

Porter recommended Value Chain analysis to investigate areas that represent potential strengths that can be used to achieve a competitive advantage. As shown in the Figure 1.3 example of a manufacturer, the supply chain adds value in a variety of ways, so it should be a critical area of focus.

Figure 1.3

Figure 1.3 Manufacturer Processes, Linkages, and Information Flow

The Value Chain model also includes linkages between the activities. For example, sales forecasts drive production, and production determines raw material and component needs. The tighter the linkages between these activities, at least in theory, the lower the inventory levels and associated costs. This model therefore was the driver for all encompassing business systems that crossed functions in an organization. It also led to business process redesign (BPR), which brings us back to the idea that just automating current (less-than-optimal) processes isn’t necessarily the best idea. Rather, new and more integrated processes should be created with linkages between the value-added activities [Porter, 1985].

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