Supply

Chain Management
Chapter 4:
Supply Chain Relationship

GEM 361
3 Credit Hours
By Sushant Karki
Henry Ford envisioned a
totally self-sufficient
industrial empire
• He set out to develop
world’s first complex
vertically integrated firm
 What did Ford do?
• Developed huge manufacturing complex that had
inland port and intricate network of rail and road
transportation
• Invested in coal mines, iron-ore deposits,
timberlands, glass factories, and even land to
grow soybeans used to manufacture paint
• Bought 2.5 million acres in Brazil to develop a
rubber plantation he called Fordlandia.
• He invested in railroads, trucks, and both Great
Lakes and ocean vessels
 And then problem occurred.
• Ford now needed help
• He faced economic, regulatory, and labor
union barriers
• This eventually required products and services
to be provided by a network of independent
suppliers
 Ford’s Realization
• Key to effective marketing was to develop a
strong network of independent dealers
• Specialized firms could perform most essential
work as well as or better than his own
bureaucracy

NO FIRM CAN BE SELF-SUFFICIENT

 Channel Structure
• Distribution or market channel is among the least
understood areas
• Channel is the arena within which a free market
system performs
• It is difficult to generalize and describe the
channel strategy because of diversity and
complexity of channels
• Channel arrangements are dynamic as firms
constantly seek to improve their relative position
 American Marketing Association :
A Distribution Channel is
The structure of intracompany organizational units
and extra-company agents and dealers,
wholesale and retail, through which a
commodity, product, or service is marketed
or
A group of businesses that take ownership title to
products or facilitate exchange during the
marketing process from original owner to final
buyer
• Since the beginning of commercial activity,
managers have been concerned with
developing and positioning customer and
supplier relationships
• Cooperation between all participants in a
channel system ultimately will result in
synergism leading to the highest level of joint
achievements
 Understanding Channel Relationships
• Not all channel members have an equal stake in the
success of each arrangement
• There are 2 types of channel participants
• A primary channel participant : a business that is
willing to participate in inventory ownership
responsibility or assume other significant aspects of
financial risk
• A specialized channel participant: a business that
participates in channel relationships by performing
essential services for primary participants for a fee
• Eg. A retailer is a primary channel and a trucking firm is
a specialized channel
A range of business typically considered primary
and specialized channel participants
Primary Participants
• Manufacturers, Agriculture, Mining, Wholesalers,
Retailers
Specialized Participants
• Functional Specialists
– Transportation, Warehousing, Assembly, Fulfillment,
Sequencing, Merchandising
• Support Specialists
– Financial, Informational, Advertising, Insurance,
Research, Arrangers
The basic focus is when developing
channel relationship, we should
determine how the capabilities of all
potential participants can be
orchestrated into a relational network
capable of satisfying end customer
expectations.
 The Economics of Distribution
How to Save Money?
• The combined capabilities of primary and specialized
participants should achieve basic requirement called
assortment
• Assortment consists of sorting and configuring
a variety of products and commodities to
satisfy the exact buyer requirements
• Primary objective of distribution channel is to
create value by generating acceptable form,
possession, time and place.
• LOGISTICAL OPERATIONS ARE PRIME
CONTRIBUTORS TO OVERALL CHANNEL
SUCCESS
 Concepts of Economies of
Distribution
• Traditional Functions
• Specialization
• Assortment
– Concentration
– Customization
– Dispersion
 Traditional Functions
• In channel perspective, A function represents
work considered to be universal to marketing
and logistics of all products and services
• A specific function may be alternatively
performed by different channel members.
• The function may also be performed or
duplicated numerous times
• Eg. Storage performed by manufacturer,
wholesaler, retailer and even final buyer
 Traditional Functions
• Exchange Functions (Ownership Transfer)
– Buying
– Selling
• Physical Distribution Functions (right product to right
place at right time)
– Transportation
– Storage
• Facilitating Functions
– Standardization
– Market Financing
– Risk Bearing
– Market Information and Research
 Specialization
• Specialization is a fundamental driver of distribution
efficiency
• Logic of specialization is based on economies of
scale and scope
• Logistic Service provider includes different types of
specialized firms.
 Specialization Examples
• A privately owned transportation carrier can
be sold and replaced by a public contract
carrier, but the function of delivery must still
occur
• Special service providers: material handlers,
custom brokers, packaging designers, and
other essential value added service providers
 Assortment
• The process of creating and positioning a mix of products
desired by customers.
• A number of essential functions must be performed by
channel participants to satisfy assortment requirements
• For efficiency , the essential functions should ideally be
performed with minimum duplication
• 3 basic steps of assortment: concentration, customization and
dispersion
 Concentration
• The collection of large quantities of a single product
or several different products so that they can
ultimately be sold as a group
• The use of a consolidated channel structure reduces
overall transactions since the customer can place
single order to the consolidation warehouse rather
than placing separate orders to each manufacturing
facility
• The basic principle of concentration is minimum total
transaction (see fig 4-6)
 Customization
• Process of sorting and grouping products into unique
combinations
• Customization often involves special packaging to
create unique products for sale through channel
arrangements. Eg. Unique product packs
• Customization involves value-added assembly of
unique promotional displays. Eg. Holiday packing,
trial samples, point of sales displays, etc
 Dispersion
• Shipping unique assortments to customers
when and where specified
• It is the final step of assortment
 Channel Relationships
• Successful distribution is possible only with the help
of channel-wide cooperation
• Each potential channel participant is viewed by
others as having core competency in performing
unique services
• Efficiency can be improved by sharing information
and by joint planning
• See figure 4.7
• Logistical relationships will develop 3 dimensions of
arrangement
– Supply chain competitiveness
– Risk, power and leadership
– Elements of successful supply chain management
 Supply Chain Competitiveness
• Supply chain arrangements increase competitiveness
among channels
• Cooperative behavior will reduce risk and greatly
improve the efficiency of overall logistical
performance
• For high degree of cooperation, supply chain
participants should share information (not just
transaction data but strategic information)
• Information collaboration is essential to allow
participating firms to do the right things faster and
more efficiently
• Second paradigm is elimination of waste and
duplicate effort
• Sharing information and joint planning can
eliminate or reduce risk associated with
inventory speculation
 Risk, Power and Leadership
• They are the major concepts to understand how
supply chain arrangement works
Risk
• Enterprises participating in supply chain
arrangements will succeed in the long run as a result
of collaboration
• Each enterprise specialize in an area that coincides
with its unique core competency
• A channel member with high specialization will have
less risk compared to overall performance. Because
of unique functions, other supply chains might
require its services.
Power:
• Over the last decade significant power has shifted from
manufacturers to retailers because of consumer support and
encouragement
• This has occurred from four unique events
– Channels are dominated by fewer firms having more extensive
coverage of consumer trading areas
– Retailers have access to vital information concerning the whereabouts
of marketplace
– Increasing difficulty and high cost that manufacturers confront in
developing new brand franchises
– Shifting of logistical replenishment from push to pull posture
• Powerful firms tend to link together in the development of
supply chain arrangements
Leadership:
• Supply chains also need leaders just as individual
organizations
• Success of supply chain arrangement is directly
correlated to the presence of constructive leadership
capable of stimulating cooperative behavior among
participants
Table 4.2 Supply Chain Leadership Visions
• A medical Products Manufacturer:
– Maximize customer satisfaction and profitability through
world-class supply chain arrangements. These promote
operations excellence and utilize information technology,
allowing management of the channel relationship and the
physical flow of product
Elements of Success:
• It is important to identify obstacles that must be
overcome to achieve success
• Research by Rosabeth involving more than 500
interviews with managers in 37 firms from 11
different areas of the world
• Findings of research indicates the attributes of
retailers and wholesalers that have enjoyed
successful supply chain arrangements
• 8 I’s that create successful We’s
 8 I’s that create successful We’s
1. Individual excellence
– Partners have something of value to contribute
2. Importance
– Relationship fits major strategic objective of partners
3. Interdependence
– Neither can accomplish alone what both can together
4. Investment
– Tangible signs of long-term commitment by devoting
financial and other resources to the relationship
5. Information
– Share information regarding goals, technical data,
knowledge of conflicts, trouble spots or changing
situations
6. Integration
– Develop linkages and shared ways of operating to work
smoothly
7. Institutionalization
– Relationship is given a formal status, with clear
responsibilities and decision processes
8. Integrity
– Behave honestly and enhance mutual trust for the long
run and mutual benefits
 Factors Increasing likelihood of supply
chain relationship success
Retailers:
• High level of cooperation
• Similarity of goals/objectives
• Clear communications
• Senior management support
• Control of Inventory
Manufacturers:
• Information sharing
• Recognition of mutual benefits
• Controlled implementation
• Joint task force
• Commitment/resource dedication
• Benefits realization
Common Obstacles when creating supply chain
relations
Retailers:
• Low-volume stock-keeping units
• Resistance of manufacturers to change
• Information systems
• Non-compatible data formats
Manufacturers:
• Lack of communication
• Trust Level
• Non compatible systems
• Resistance of customers to change
 Logistical Service Alliances
Alliance: An association to further the common
interests of members

A bond or a connection

Managing in uncharted areas

FACTORS STIMULATING SERVICE BASED ALLIANCE
4 basic ways to build strong working relationships
Mutual Dependency:
• Dependency must be acknowledged by both
parties involved in an alliance
• Ensure all customers remain fully informed of
expected and actual delivery performance
• Maximum use of information technology
Core Specialization:
• Economies of scale and economies of scope
must be utilized and extended logically
Power Clarity
• How to handle in case of power/conflict
dynamics of inter-organizational arrangements
• Determine who is the powerful as significant
power struggles may occur between dominant
institutions in a channel
Cooperation Emphasis
• Cooperation will always lead to excellence eg.
Zero defect execution of a specified task needs
cooperation
 Increasing Service Provider Efficiency
• Service firms use alliance to improve
competitiveness
• The most common solution for creating strong
intermodal fusion has been the strategic
alliance
• Vertical Alliances and Horizontal alliances
• Many service suppliers have become experts
in performing tasks that are generally
perceived as inconvenient or burdensome to
customers
 Integrated Logistics Service
Providers
• Industry participants offer potential customers
the ability to purchase two or more aspects of
their overall logistical requirements from one
supplier
• Eg. Warehousing and transportation, where
firm receives customer orders, picks and packs
the merchandise and then completes delivery