Supply Chain Management Creating Competitive Advantage

According to extensive Christopher (2005) the supply chain can basically be described as a triangular relationship between three Cs, the customer, the company and competitors. Christopher and Hines (2004) both suggests that the term ‘chain’ should be replaced by ‘network’ as the number of inter-connections between suppliers can be extensive. A well-managed supply chain can be a resource that enables an organisation to develop and sustain competitive advantage in a global market in a volatile economic environment together with industry re-organisation and increases in internet driven sales.

‘Supply chains compete not companies’ is Christopher’s motto on his web page and summarises how competition is a key issue for organizations. With the advent of internet shopping there is an abundance of competitors ready to provide ever demanding consumers with the products they desire. Consumers want better quality, faster delivery and at a lower cost. Individual businesses cannot function alone, but have an inter-dependent relationship with integrated supply chains, whose success or failure is ultimately determined in the marketplace by the end consumers (Christopher and Towill, 2001; Monczka, Handfield, Giunipero & Patterson 2009).

Organisations that focus on developing the most cost effective and efficient supply chains will be the market winners and achieve a competitive advantage. A company’s competitive advantage can be defined as the ability to make a higher profit than competitors through differentiation of products or services from those of competitors and better products or services in terms of quality and cost than competitors. Good supply chain management (SCM) enables quick response from supply chains to meet customer demands. In order to maintain competitive advantage dynamic businesses need short lead times, the ability to manage the peaks and troughs of demand (Sabath, 1998), and incorporate time-based competition (Stalk, 1988; Droge, Jayaram & Vickery 2004).

The aims of the literature review are to examine what contributes to a dynamic company in respect to a sustainable competitive advantage, responsive supply chain management (RSCM) with relation to dynamic industries including the fast fashion industry. The literature review will examine the factors that contribute to a company’s strategy development for product differentiation and competitive advantage. Porter’s (1990) five forces analysis provides organisations with a framework to identify competition and market position will be discussed. The relevance of time-based competition and a review of different types of supply chains including supply chain management will also be presented. The different types of supply chains to be examined include value supply chains, agile and lean supply chains and Responsive Supply Chain (RSC). The literature review concludes with an assessment of the apparel industry in the UK and implications and impact of the supply chain. Is the supply chain as effective as the literature depicts?

Internal analysis of an organisation

An internal analysis of a company provides managers with an insight into the success of the business for example how effective are its current strategies? Are its resources deployed effectively to support its strategies? In addressing such questions it is the business itself that determines it competitiveness. If a company undertakes an internal analysis it can identify competencies and core competencies which can be developed the importance of which will be discussed again later in this review. The internal analysis can also examine value-added activities and again these will be discussed in more detail later. Managers can also evaluate financial performance particularly in relation to competitors and identify areas of weakness.

In many companies the majority of products go through the following stages; research and development prototyping, and then introduction of the new product, if the product is successful there will be market growth and profitability and competitors will become apparent. There will be a period of growth during which the product matures and this is the stage of product differentiation where the product dominates the market. Eventually the product declines as either new products are developed or improved upon by the competition. Management should know what stage their products are in as they can then develop their strategy.

Business strategy analysis

Business strategy is a process consisting of three phases; strategic analysis,

strategic selection and strategic implementation. Strategic analysis evaluates the company’s position in the market, the strengths and weaknesses of the product, and evaluates other companies who represent the main competitors. Strategic selection and implementation involves obtaining the goals identified as a result of the strategic analysis.

Porter (1990) developed a framework known as the five forces model which assists with the analysis of factors contributing to a competitive advantage and to develop a competitive strategy based on positioning in the market. In a similar way to a SWOT analysis the five forces analyses competitive intensity and the attractiveness, in

terms of the profitability of a company.

Figure 1: from “The five competitive forces that shape strategy” by Michael E Porter Harvard Business Review 2008

The five factors illustrated in Figure 1consist of; the risk of entry into the market by potential competitors; the bargaining power amongst buyers; the bargaining power of suppliers; the closeness of substitutes to an industry’s product all four of which contribute to the final factor which is the intensity of competition amongst established companies within an industry

There are factors that moderate the threats firstly; the threat of new entry competition may be moderated by factors such as economies of scale, product differentiation, capital requirements, or switching the cost to buyers. Second, the buyer’s power may be moderated by the number of buyers relative to sellers, product differentiation, buyer’s profit margins, switching costs to other products and how important the product is to the buyer. The third force is the threat of substitute products moderating factors includes the relative price and quality of the substitute product and switching the cost to the buyer. The fourth force is the determinants of supplier power, supplier concentration, availability of substitute inputs, importance of suppliers input to buyer and supplier’s product differentiation. These factors all contribute to the fifth force the competition and rivalry amongst existing firms which depends on the diversity, size and number of competitors, how quickly the industry is growing and the range of product differentiation.

Porter’s views have been disputed by Booth and Philip (1998) and Edwards (1997) who suggest that organisations should be flexible and unite both cost leadership (lowest production cost or higher rate of return) and differentiation in order to give customers unique value. Other criticisms include Porter’s emphasis on analysis and little information about formulation or implementation as van den Bosch & de Man (1994) argue diagnosis does not necessarily lead to health (p. 14). According to Mintzberg (1990) the organisation must gain market power diminishing the buyer’s and supplier’s power which although the five factors may mean economic power it could be mistaken for political power and finally bias towards large, established businesses as new companies or industries can only be analysed once they are established (Hamel and Prahalad 1989). Other critics (e.g. Sharp & Dawes) have also labeled Porter’s conclusions as lacking in empirical support; have been justified using selective case studies to support his perspective and for inconsistent logical argument in his claims.

The sources-position-performance model (SPP) (Day and Wensley, 1988; Hunt and Morgan, 1995) is also a strategic framework for competitive advantage and reflects Porter’s 1985 proposal of positional advantage in respect of either cost or differentiation. The SPP model proposes that an organisation’s ‘sources’ (for example superior skills or resources) can be maximised to achieve a ‘positional’ advantage (for example differentiation in lower costs or higher value) which finally results in a superior ‘performance’ outcome (for example an increased market share and/or higher profitability). Day and Wensley (1988) suggest that a differential positional advantage can be achieved with the brand name, features that are innovative and a product that is of high quality. These factors contribute towards the potential for obtaining a secure market position and a profitable market performance. Doyle and Wong (1998) support this viewpoint reporting that successful company’s differential advantage was acquired through product differentiation, services and the reputation of the company. Competitive advantage can also be maintained by re-investing some or all of the profit back into the company.

For better customer satisfaction and market understanding, companies are striving to achieve the best performance from their supply chains by three key components (Fisher, 1997) these include responsiveness of the supply chains, accurate demand forecasting and inventory management. In a dynamic, globalised and competitive environment, companies are under pressure to improve their supply chain strategies in order to be more responsive to customer demands. Christopher (2000) defines responsiveness as the ability of a supply chain to respond rapidly to changes in demand, in respect of amount and variety.

(Fisher, 1997; Christopher, 2000, 2005) Uncertainties in demands are unavoidable due to the changing market conditions and customer expectations. In supply chains, inventory is the currency of service that helps deal with uncertainty and provides flexibility, though it can be costly (Chase and Aquilano, 1995; Bernard, 1999)

Time-based strategies

In current competitive markets if customers cannot get what they want from one company they will go to the competition. Leading companies such as Federal Express and Honda have demonstrated that if organisations are able to implement time-based strategies in areas such as production, developing new products, selling goods and the supply chain this can represents a powerful competitive advantage. In a survey of American companies Davis (1995) found that a high priority for the majority of organisations was time-based competitive strategy. Customers appreciate receiving their products promptly and this also encourages market growth as prompt delivery is a competitive advantage. It is not necessary to have a large stock of goods because efficient manufactures can deliver an order on the day it is received. The concept of time-based competition was introduced by Stalk (1988) and emphasises time as an important factor in developing and maintaining a competitive advantage. A time-based strategy aims to reduce time in the stages of product proposal, development, manufacture, marketing and delivery. The business cycle time can be defined as the total time between receiving an order and getting the product to market which is particularly relevant to the fast fashion sector.

If a company adopts a time-based strategy there appear to be a few strategies that can be implemented. Examples include starting afresh as it is not sufficient to just attempt to speed up existing activities. Another approach is to use a systematic framework to evaluate the requirements of customers and suppliers and then only undertaking only those tasks that fulfil the requirements. This strategy could reduce cycle time and could be implemented as part of the Total Quality Management (TQM) process. Another area that could be re-assessed is the approval process which means that the number of times a product or service needs internal approval before reaching the customer could be reduced.

Stalk and Hout (1990) reported that successful companies that utilise time-based strategies will be able to offer a wider variety of goods at low cost and faster delivery times in comparison to the competition. Stalk and Hout also argue that there are a number of myths in business concerning increases costs when reduced lead times and response times are reduced however, when offered together with an increase in the variety of products which customer’s have requested there can be a very profitable upsurge for a time-sensitive company in comparison to the competition. It is also argued that time-consumption is quantifiable and therefore manageable.

Successful companies focus on reducing delays and perhaps eliminating them altogether in order to gain a competitor advantage. Stalk and Hout argue that the majority of businesses can use time in a positive and constructive way and increase profitability. An example of flexible manufacturing and rapid response systems is presented by Ruch (1997) reports that in the past Motorola used to take three weeks to complete an order for a pager whereas an order is now completed in two hours.

In relation to the fast fashion industry distribution is a major factor as the demand for current fashion trends require an efficient distribution system and competitive advantage will be lost if products are delayed in the distribution chain. There are two time-based strategies used; fast to market and fast to produce. Companies that are competitive regarding the to-market speed emphasise reductions in design lead-time. The company has the ability to minimise the time it takes to develop new products or make rapid design changes. Fast-to-product companies emphasise speed in responding to customer demands for existing products. Wal-Mart has been able to dominate its industry by replenishing its stores twice as fast as its competitors (Stalk 1998).

Vickery, Droge, Yeomans and Markland (1995) found that new product introduction was the most consistent predictor of business performance. Development cycle time was second and production lead time and delivery speed were not as significant predictors of success as the first two. However this research is now quite old and it is possible that it is not relevant to the fast fashion business in terms of speed of delivery not being such a strong predictor of success

As an example of a fast fashion company using time based-competition Gunasekaran (2001) cites Benetton an Italian company which produces distinctive casual wear for children, men and women and is a good example of an agile organisation using time compression. Benetton has centralised management and operations for a global market using more than 400 sub-contractors. The company has found that the fastest way to utilise a distribution system was through rapid feedback from over 400 travelling sales representatives, producers and the warehouse. If an item is selling the producers will work in fast-turnaround which has had a huge impact on reducing the time for replacement items. In order for this to be successful there needs to be a flawless flow of materials to allow agility in the production stage and this is organised by the production division. Benetton’s competitive advantage is the customer ordering system and the company’s advance use of IT (p. 389-390). Gattorna and Walters (1996) report that Benetton delay dyeing their jumpers until the end of the supply process so standard jumpers are customised at a late stage and therefore allows some customer choice but without long lead-times and the risk of the product being outmoded.

Davis (1995) states that Benetton’s system cost $30 million to build yet only eight people are required to operate it and the company can move 230,000 items of clothing each day. The warehouse is mechanised and the bar codes are scanned, goods are selected and transported. From order to store the overall cycle time for goods in stock is one week, if not in stock four weeks.

Getting the right products to the customer at the right time, cost, place, condition and quantity, information technology and logistics networks are very dependent on the supply chain management and the type of supply chain used which will now be discussed in the following sections.

Supply Chain Management

The logistics involved in providing the consumer with the required products is complex. Issues such as time (as discussed above), outsourcing, off-shoring and global competition are a few examples and this means that the supply chain has taken on increasing importance (Monczka, Handfield, Giunipero and Patterson 2009).

The supply chain is defined by Mentzer, Dewitt, Keebler et al (2001) as a group of three or more companies connected by an upstream or downstream flow of goods or services. Supply Chain Management (SCM) is the strategic organisation and proactively management of all the inter-related activities. The activities can be internal or external to an organisation and may also be across international and cultural boundaries. Supply management is defined by Monczka et al (2009) as a ‘strategic approach to planning for and acquiring the organizations current and future needs through effectively managing the supply base ……..with cross functional teams (CFTs) to achieve the organisation’s mission’ (p. 8). SCM includes operations such as the evaluation and selection of the supplier; New Product Development (NPD); ensuring the implementation of the customer’s order; and maintaining demand and supply.

According to Gattorna and Walters (1996) there are five basic functions required for a balanced supply chain which include procurement (maximum purchasing discounts); inboard logistics (low transportation costs); operations (low production costs), marketing and sales (wide product variety and high availability); and outbound logistics (low transportation costs). In order to develop an integrated supply there also needs a flow of information at three stages, strategic, tactical, and operational

SCM differs from ‘purchasing’ or ‘procurement’ as Kalakota and Robinson (2000) state they much broader concepts, Purchasing is often described as the ‘five rights;’ right quality, right quantity, right time, right price and right source (Baily, Farmer, Jessop, & Jones 1994). SCM is a more dynamic and strategic approach than purchasing which is also referred to as strategic sourcing in the literature (e.g. Gottfredson, Puryear and Phillips 2005). The phrase ‘strategic sourcing’ originated as a buzz word in the 1980s from management consultants such as PricewaterhouseCoopers when working with Blue Chip companies however the development of the term raises an significant and relevant issue concerning the emphasis that sophisticated, world-class leaders (WCL) place on SCM (Kasul, & Motwani, 1995). Other companies may aspire to be WCL and this drives competition.

An organisation particularly a newcomer to the market might benefit from trying to identify characteristics in WCLs as it might provide an opportunity to implement and improve their internal and external processes, core manufacturing strategies and develop a global strategy to achieve company-wide improvements towards WCO status and global competitiveness.

A starting point could be the strategic management of the supply chain and there are four main factors that characterise supply chain management these are information, time, customer demand, and response strategy for problems. Firstly, there must be a good flow of information between groups or individuals who may be culturally diverse. Good communication promotes good relationships and reduces time delays in the chain. Cost and accessibility are issues that management must consider.

The second factor is time, whether the supply chain is efficient which, as previously discussed, is seen as competitive advantage. As the amount of competition in both the domestic and international markets increases organisations must have an efficient supply chain in order to compete. The third point also previously discussed involves the increasing demands and expectations of consumers and also the range of alternative options available to them therefore management may also want to consider customer loyalty. The final point in supply change management is the

organsation’s response strategy to any major disruptions in both supply and downstream production which will the lessen the impact on lost sales.

SCM necessitates good team work as it involves those who are purchasing the goods, the supplier, quality assurance and other associated roles the relationship is not adversarial as may have been the situation in traditional purchasing but in business SCM encompasses a win-win situation for the supplier and the company purchasing the goods. The relationship needs to be beneficial for all parties to allow for rapid change which is particularly relevant for the fast fashion industry.

When developing a supply chain strategy Fisher (1997) stated that in order to implement the optimal approach the relationship between supply and demand must be coordinated to take into account the type of product, demand and sales predictability. Products can be categorise into two generic types, fashion

and commodities. Fisher states that fast fashion has a short life-cycle and high demand uncertainty, and that there is the risk to the supply chain of both stock out and outmoded products. Popular, trendy clothing requires a management strategy that can co-ordinate the supply and demand and allow companies to respond faster to the marketplace.

Commodities that are basic products, such as tinned food, they have comparatively

long life cycles and have a low demand uncertainty usually because they are well-established products with a known consumption pattern. The driving force for commodity supply chains is the reduction of cost. Hill’s (1993) manufacturing strategy metrics, notes that the main difference between the two groups of products for fashion products is the emphasis is on availability, while for commodities is the emphasis is on price.

Supply chains and value chains

A business can be considered as a system that converts inputs (resources or materials) into an output (goods or services). All of the internal actions of a company add value to the inputs. The value of the completed product is equal to the price a consumer is prepared to pay. The activities of a business can be broken

down into a sequence of activities know as the value chain.

Porter’s value chain model was developed in the 1980s and proposes that an organisation’s supply chain can lead to a competitive advantage (Porter 1985; 1996). Porter original model proposed that the value supply chain was focused on the company’s internal employees. Porter stated that a supply chain is a subset of a value chain, for example all personnel within the organisation are part of a value chain whereas they are not part of the supply chain.

A diagram of Porter’s model is shown in Figure 2 two components are shown the Primary and Support activities. Support activities are shown in the horizontal flow and are the operational part of the value chain (the supply chain). Primary activities directly add value while support activities add value indirectly by supporting the effective implementation of the primary activities. At an organisational level the value chain is depicted as being broader than the supply chain because it includes all activities in the form of primary and support activities. The difference between the end value and the total cost is the margin.

Figure 2: The Value Chain (Porter 1996)

The value chain has developed and expanded from Porter’s original concept (the internal employees of an organisation) to include suppliers and customers and is referred to as the extended value chain or extended enterprise. This development has occurred because progressive companies acknowledge that successful management of cost, quality and delivery may depend on suppliers that are located several levels away from the producer. Porter’s value-chain analysis provides an explanation of how much value is added to an organisation’s final products or services in comparison to the original cost of the materials or resources. There is a clear relationship between value-adding activities, such as the core competences and competences which provide knowledge and skills necessary to undertake the value adding activities and resources which form the inputs to a company’s value adding activities.

In order to maintain a competitive advantage a company should be able to undertake an analysis of the value chain which should enable a company to obtain a breakdown of all the activities the organisation undertakes and to identify the core activities and their relationship to core competences. A competence is a quality or a collection of qualities which the companies in a particular industry possesses

A core competence or distinctive capability is a quality or collection of qualities which is specific to a particular organisation which enables it to produce above the average performance of the industry as a whole. As a result of a distinctive capability is an output that customers value more highly than those of competitors, the competitive advantage. In order to be successful in business companies certain competencies are necessary but the core competences are the differential.

The company should be able to identifying areas where the cost of adding the value is greater than the value added; the identification and assessment of non-value adding activities. A good TQM process involves defining the process for producing products or services, using mapping or flow-charting techniques to identify non value-added tasks these tasks are then either improved or eliminated. Management can develop strategies to find new ways to acquire value (for example a new production plant near to the company’s head office with add value because transportations costs will be less).

In respect to SCM the amount of the value added by teams within an organisation should be assessed and periodically reviewed and any blockages that reduce a company’s competitive advantage must be identified. The assessment of the organisation’s value chain should not be undertaken in isolation but considered together with its association with suppliers, distributors and customers. It is also necessary to verify whether the value chain supports the organisation’s current strategy for example if strategy is to cut costs the analysis should focus on this. If strategy is the production of high quality goods the focus should be on strategies to improve quality outcomes.

Outsourcing is an activity that can be used as part of the overall sourcing strategy for services. Outsourcing entails the transfer of staff and assets to an external or third-party company which then provides them back as a service. Outsourcing is an example of companies concentrating on their core activities and competences while getting the support activities done by someone else as such outsourcing has the potential of giving both parties a competitive advantage. The role of SCM is to evaluate which activities the company should undertake and which should be outsourced.

An important consideration is that there will be different value chains for different organisations because not all activities within a company are of the same importance in adding value to its products. Activities that do add value are the core activities and are usually linked closely to the core competences. An organisation’s value chain will also be part of the value chains of other companies, for example the suppliers and distributors and customers. It is unusual nowadays for a solitary organisation to undertake all the value-adding activities ranging from design, production, delivery and service provision for a product.

Three different types of supply chains will now be discussed in the following section, agile supply chains, lean supply chains and RSC

Agile supply chain

Supply and demand has been identified as the Increasing volatility in demand and competitive pressures force more frequent product changes (Gattorna and Walters 1996) agile supply chains are usually dominated by surge (Fisher 1997). An agile supply chain has to be created to manage uncertainty, satisfy consumer demand and ensure profitability. The definition of agility ‘Agility means using market knowledge and a virtual corporation to exploit profitable opportunities in a volatile marketplace’ (Naylor, Naim, & Berry, 1999 p. 62)

Today’s consumers demand variety and companies need to demonstrate ‘customer responsive’ behavior with suppliers, being able to adjust quickly to meet market demand and to replace one product for another. In a genuinely agile business the strategy and supply chain relationships are developed to such an extent that volatility of demand is dealt with (Christopher 2000). Uncertainty is characteristic of today’s markets as a result of a combination of factors which include the globalisation of the supply chain, concurrent inexpensive IT and communications; increased ability to develop product variety and reduce product life cycles while remaining cost competitive. These drivers promote end-consumers promote these drivers to demand greater choice and improved value (Li 2009). These dynamics are especially relevant in the context of the fashion industry and clothing retail in general (Sparka and Fernie, 1998; Jones, 1998; Jones 2002). With economic changes in recent years and greater global competition responsiveness is essential throughout the supply-chain (Gattorna, 1998; Pine, 1993; Goldman, Nagel, & Preiss 1995; Christopher, 2005) with such significant changes, successful organisations have to remain competitive while adapting to changing marketplace conditions (Brown and Eisenhardt, 1998). A significant feature of an agile organisation is flexibility (Christopher 2000) and this idea originates from flexible manufacturing systems (FMS). Agility is necessary in environments that are not predictable with volatile demand and consumers require variety. If a product is highly fashionable then, by its

very nature, its demand will be unpredictable (Mason-Jones, Naylor, & Towell 2000)

Agile supply chains are market sensitive which means there is a quick response to consumer demand. This is quite different to many organisations which are forecast driven rather than demand driven. Technology can assist in demand driven organisations as data can be quickly accessed from the point of sale. As mention in the section on SCM communication between the members of the supply chain is an important factor in its success. Shared information between supply chain partners requires collaborative working and process integration between buyers and suppliers, joint product development, common systems and shared information. This form of co-operation in the supply chain is becoming ever more prevalent as companies focus on managing their core competencies and outsource all other activities. Mason-Jones and Towell (1999) undertook a simulation model of the fashion trade supply chains and corroborated that enhanced agility resulted from enrichment information along the supply chain.

Lean supply chain

The agile supply chain is closely connected to the lean supply chain although they are separate and have different purposes. Lean supply chains work well in environments where demand for variety is low and the environment is predictable whereas agile manufacturing is implemented where demand is volatile, and lean manufacturing is put into effect where there is a stable demand. Mason-Jones et al (2000) offers a further third option which they term the Leagile Paradigm a hybrid mixture of both types of supply chain.

Responsive Supply Chains