Article Presentation

Supply Chain Management

Moiz Jehanzeb
Nael Chiragh
Section N
Concentrated Clusters and Supply Chain Management
UPDATED JAN 8, 2015 ANDREW THOMPSON

Concentrated clusters can enhance the management of supply chains and improve overall firm
performance. However, concentrated clusters vary between international firms and domestic
firms. Also, managers must recognize the negatives of the concentrated cluster theory.

Concentrated Clusters Enhance Supply Chain Management

Concentrated clusters can enhance the management of supply chains by providing a stable
supply base and a network of suppliers that is easy to coordinate, especially when considering
that a supply chain can involve various suppliers that the firm would need to coordinate with.

Concentrated clusters have long existed in the form of industry associations that require related
firms to contribute financially for the development of solutions that can benefit the entire
association. Concentrated clusters can also exist in the form of kinship or family-based relations
underlying business ownerships.

Concentrated clusters can be tightly knit, such that there is a high degree of cooperation among
the members of the cluster. There is the ability of clusters to share information with each other,
and to provide support for each other towards the growth and development of the member
companies.

Because of the ability of concentrated clusters to share information and cooperate at high
degrees, concentrated clusters can lead to the development of a virtual support system that can
maintain stable supply of products. The cluster itself serves as a buffer to the supply amid
changes in demand. Thus, concentrated clusters can enhance supply chain management by
providing stability in supply of materials. Such stability minimizes delays in delivery of
materials. Corollary to this, the supply chain becomes more efficient, as the firm would
experience fewer delays and a better stable flow of materials through the chain. The increased
efficiency of the supply chain leads to improved overall firm performance.
The Concentrated Cluster Concept Varies between International and Domestic Firms

The concept of concentrated clusters can vary between international firms and domestic firms in
terms of the scope of the operations of the firm, in terms of the fluctuations in supply, and in
terms of the actual stability of the concentrated cluster. These considerations are important in
analyzing the effect of the concentrated cluster on the performance of the firm. Managers must
also consider the possible limitations that these concentrated clusters have according to the legal
and regulatory aspect of business.

In terms of the scope of the operations of the firm, an international firm would have a bigger
scope than a domestic firm, such that the supply chain of the international firm would be bigger.
The bigger scope also means that it would be more difficult to establish a concentrated cluster
that can be of significant benefit to the firm, especially when considering that it may be difficult
to establish a collaborative network of suppliers in a big scope. Also, the firm may find it
beneficial to source certain materials from one place, and another material from another region.

In terms of the fluctuations in supply, the international firm that is able to establish a
concentrated cluster can experience less fluctuation in supply, especially if the cluster is based on
a group of different countries. A market slowdown in one country would not readily affect the
market in the next country. The international firm would experience a more stable concentrated
cluster. The small scope of the operations of a domestic firm also translates to a smaller scope of
concentrated clusters that it can use. A domestic firm would have a concentrated cluster that can
be limited in buffering changes in the market.

The legal and regulatory aspect of doing business can significantly impact the ability of the firm
to benefit from a concentrated cluster in its supply chain. The domestic firm tends to be limited
in using concentrated clusters overseas, such that the domestic firm experiences fewer barriers to
accessing concentrated clusters of suppliers. In terms of the actual stability of the concentrated
cluster, the domestic firm may experience better stability in terms of regulatory influences, while
the international firm may experience better stability in terms of market influences.

Negatives of Concentrated Clusters

Concentrated clusters create a collaborative system of firms/offices that helps minimize

competition. A negative effect of concentrated clusters theory is the potential increase in prices or
the increase in the costs of materials that members of the concentrated cluster supply.
Concentrated clusters lead to an organization of suppliers that can function as a single entity in
market influence. For instance, a concentrated cluster can create its own rules and standards, as
well as limits on the changes that these suppliers can make on the prices of their products. In
effect, concentrated clusters can function as a price regulating entity, such that they can impose
significant pressure or force on the firm. The result is that the firm may have reduced benefit in
accessing cheaper materials, as the concentrated cluster can effectively stabilize the prices for all
members of the concentrated cluster.
Final Note

Concentrated clusters provide stability of supply and contribute to the efficiency of the supply
chain. A concentrated cluster can make it easier for a firm to communicate with its suppliers and
can ensure a stable flow of materials though the firms supply chain. However, concentrated
clusters can function as a means through which the suppliers can make agreements with each
other regarding the price of their products, such that the firm can experience less benefit in cost
advantages in its supply. When implemented properly and when a balance is created, the firm can
benefit from concentrated clusters without compromising much of the cost advantage available
in the firms supply chain.