No doubt that the efficient management of the Supply Chain is crucial for any business, but the grasping question always comes is how does it create value for the firm? More still, how can that value be better managed so as to create competitive advantage for the firm?
While the Value Chain analysis as developed by Michael Porter in 1985 argues as being efficient for creating a sustainable platform for value generation for firms so that they may achieve competitive advantage in the industry, the proposition is not without major limitations, like all other popular frameworks in strategic management literature.
Theory of Economics is one of many possible ways to define and measure value.
While operationalizing the definition of value, it is crucial to note whether the exchange that creates this economic value is between business entities i.e. Business to Business (B2B) – or between a firm and a consumer – i.e., Business to Consumer (B2C).
Since Supply Chain is intrinsic to creation of economic value between business entities only, we focus on B2B value creation. There are 3 forms of value that is created in B2B type economic transactions that is widely accepted in strategic management literature focusing on Supply Chains.
- Technical value, which is intrinsic to the resource being provided and occurs in almost every economic exchanges.
- Organizational value, which is built upon the context of the exchange, and may derive from a range of factors such as ethical standards, prestige, reliability, and association. This may help the organization get more than the normal economic value from the transactional point of view, in terms of helping the same to achieve some degree of competitive advantage.
- Personal value, which is derived from the personal experiences and relationships involved in the exchange of resources and the benefits provided to the entities associated with the firms bounded by the economic exchange.
Value in supply chain gets created through the following processes:
- Supply chain modeling must be done quantitatively and objectively. Understanding of the goals objectively is crucial for its success.
- The major challenge in an excellent supply chain network is not to build a model but to model the sensitivity of one variable against others optimally. A simple model can work fine in many cases. However, supply chain experts (OR & Analytics Professionals) should be involved immediately when doing multi-layered inventory strategies, industrial engineers and operations.
- The fundamental building blocks of work are the methods and standards for the tasks. Value creation occurs when the changing business dynamics can be effectively modeled regularly to drive maximum benefits. (remember the Theories of Constraints?)
So creating value from supply chain should be a major focus for all manufacturing companies.
This is crucial to improve the effectiveness and efficiency of not only the supply chain in particular, but for the overall firm productivity.
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Buyer-Supply networks are composed of multiple numbers of firms from a variety of interrelated industries. Such networks are subject to shifting strategies and objectives within a dynamic environment, guided by (micro factors) internal factors of the individual firms and also by the (macro factors) industry dynamics of the same. Today, supply chain management involves adapting to changes in a complicated global network of organizations. As a result, buyer-supplier network decisions and the optimization of the same have become the center stage and concerns the scrutiny of the top level managers.
Two emergent challenges that managers frequently have to address when making these decisions are the structural intricacies of their interconnected supply chains and the need to learn and adapt their organization in a constantly changing environment to ensure its long-term survival. Complex interconnections between multiple suppliers, manufacturers, assemblers, distributors, and retailers are the norm for industrial supply networks. When decision making in these networks is based on non-complex assumptions problems are often hidden, leaving plenty of room for understanding and improving the underlying processes.
Along with managing the complexity inherent in the inter-connectivity of their supply networks, organizations have also started to learn the benefits of being adaptive in their behavior. Because organizations exhibit adaptivity and can exist in a complex environment with myriad relationships and interactions, it is a natural step to identify a supply network as a CAS. Research indicates that that supply networks should be recognized as CAS by providing a detailed mapping of each property of CAS to a supply network.
- A CAS consists of entities that interact with other entities and with the environment by following a set of simple decision rules (i.e., schema). These entities may evolve over time as entities learn from their interactions. In contrast to relational modeling, which tries to use one set of variables to explain variation in another set of variables, CAS examines how changes in an individual entity’s schema lead to different aggregate outcomes.
- A CAS is self-organizing. Self-organization is a consequence of interactions between entities. Self-organization is defined as a process in which new structures, patterns, and properties emerge without being externally imposed on the system. Because the behavior in complex systems comes from dynamic interactions among the agents and between the environment and the agents, the changes tend to be nonlinear with respect to the original changes in the system.
- A CAS coevolves to the edge of chaos, just like coevolution, positing that a CAS reacts to and creates its environment so that as the environment changes it may cause the agents within it to change, which, in turn, cause other changes to the environment.
- A CAS is recursive by nature, and it recombines and evolves over time. Furthermore, from a macroeconomic viewpoint, it can be posited that industry supply networks are interrelated within a national or international context and interact together as a CAS in a larger context.
Supply chain research has gained a lot ever since the conceptualization of buyer-supplier networks was done through CAS. What do you think should be the way ahead?
adapted from pathak et al.,2007
E-markets have been established in many industries as a sourcing option for buyers. Research has implied that the e-markets have substitutional effect on the traditional supply chain, yet in many situations, e-markets are used by buyers as a benchmarking tool in negotiations with traditional suppliers. The late 1990s and early 2000s have seen the rise and fall of many e‑marketplaces. Despite being hyped for their ability to benefit firms through dynamic pricing as well as lower transaction costs, most e‑markets failed, never reaching their expected potential.
Many suppliers long-term relationships with buyers, were reluctant to participate in e‑markets fearing that their products may be standardised and they may have to compete on price. On the buyer’s side, e‑markets introduced new suppliers, which for buyers created a greater risk of acquiring defective or inferior goods but prices would become cheaper also. Moreover, the decision of buying into a business-to-business (B2B) e‑market is often made by the procurement department, the functionality of being threatened by the e‑market. The decreasing bargaining power of sellers and increasing power of buyers led to a shift in dynamics. Those products were identified which have a strategic value to the firm, were directly sourced from suppliers, and the new mantra is focus on non-contractable investments in such relationships. All standardised products are now preferably sourced through e-markets (indirect sourcing).
E-markets have also affected the buyer supplier relationships. The firms should focus on building long term relationships (partnerships) and mutual value creation through investments of non-contractable nature, to be made by both the partners. But these partnerships should be dependent mostly on items having high volume and for those with high criticality. The firms today should focus on vendor development programs also. The rest of the requirements should be indirectly sourced through e-markets.
Harnessing the power of e-markets is the mantra of the day. No firm can survive without it. The problem is joining without understanding the dynamics of e-markets, the firm may be exposed to a high risk.