BM1913

UNDERSTANDING THE SUPPLY CHAIN

Value as a Utility
Myerson (2015) defined utility as “the value or benefit a customer receives from a purchase.” According
to him, the following are the basic types of utility:
 Form utility. It is performed by the manufacturers and third-party logistics companies through
value-adding activities that make a product or service more useful.
EXAMPLE: A car manufacturer has an option to sell car parts separately but assembling these parts
into a functional vehicle adds value for their customers.
 Time utility. It requires having the products and services available when needed.
EXAMPLE: A company known for the shortest lead times in product delivery is often the first
choice of the customers.
 Place utility. It requires having the products and services available at the most convenient
locations for the customers.
EXAMPLE: A popular product which is only sold abroad becomes locally available, thereby
increasing the perceived value of the customers to the product.
 Possession utility. It requires efficient transfer of ownership to the customer, including extension
of credit, after purchases.
EXAMPLE: A particular government office facilitates efficient transfer of ownership for land titles.
Thus, customers would choose to process their related transactions to that specific office because
of the increased value that it provides.
 Information utility. It requires a two-way flow of communication between customers and
manufacturers.
EXAMPLE: A real estate broker is transparent with all the charges involved in purchasing a house,
including added taxes and local administrative fees, thereby increasing his perceived integrity
which communicates added value to the customers.
 Service utility. It requires a fast and friendly service during and after the sale and teaching
customers how to best use the products.
EXAMPLE: An electronic brand extends its product warranty to three (3) years and regularly
conducts demo on how to properly use its products, thereby increasing its value to the customers.

Supply Chain Strategy Elements and Drivers

Perez (2013) stated that “supply chain strategy defines the connection and combination of activities and
functions throughout the value chain, in order to fulfill the business value proposal to customers in a
marketplace.” In connection, he described how the supply chain strategy is driven by the interrelation
among four (4) main elements:
 Industry framework. It involves identifying the interaction of suppliers, customers, technological
developments, and economic factors that may impact competition. It also determines the
following factors that affect supply chain design:
o Demand variation. This can be a wide array of manufacturing and supply chain costs and is
therefore a major driver of efficiency and ultimately cost.

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 o Market mediation costs. These are costs incurred when supply doesn’t match demand,
often resulting in either lost sales or higher than needed supply chain costs and excess
inventory.
o Product lifecycle. This affects demand variability as well as marketing and supply chain
costs. Advances in technology, as well as consumer trends, have reduced the time to bring
an item to market as well as its useful life.
o Cost of assets. This largely affects businesses requiring a high utilization rate to remain
profitable. This encourages high utilization of assets that often results in higher inventory
costs and lower service levels. Industries that have lower-cost assets can focus on being
more responsive.
 Unique value proposition. This is best understood after establishing the competitive priority
strategy that the organization has selected in terms of its supply chain. It is a clear statement that
describes the benefit which can be derived from a particular product or service. It may also offer
solutions to a particular social problem or highlight a competitive edge over rival products.
Organizations must integrate their unique value proposition to their strategy in order to maintain
key drivers of potential growth and success in the supply chain.
 Managerial focus. This ensures proper linkage and alignment of an organization’s supply chain to
its competitive priorities. This can be accomplished through decision-making process and
management focus. It can be very easy for management to only focus on efficiency-oriented
performance measurements at the expense of the competitive priorities set by the company.
Misalignment can result in the supply chain being sub-optimized or misaligned by attaining local
cost efficiencies at the cost of the value proposition offered to the customer.
 Internal supply chain process. These must be connected and aligned properly to the supply chain.
It involves determining the appropriate decoupling point or the process in the supply chain
network where the activities are no longer driven by individual orders. This means that
organizations must identify which of their internal processes are driven by forecast-based planning
and by actual customer orders. In this way, organizations will be able to prioritize the products or
services which represent customer orders. For instance, after identifying that most of the
customers’ demands represent wheat bread over white bread, a company decided to focus more
on producing wheat bread since their production for white bread is simply grounded on forecast-
based planning.

Supply Chain Strategy Methodology

Dittman (2012) summarized the steps in developing a supply chain strategy as follows:
1. Identify customers’ current and future needs. This involves creating a balance of benefits among
the stakeholders of a given organization such as customers and shareholders. It also ensures
added value to the product or service, derived from the following:
o Customer value. It is the customer-perceived benefits gained from a product/service
compared to the cost of purchase.
o Financial value. It involves management of reliable supply and logistics service, low
inventory cost, and short cash-to-cash cycle times (conversion of receivables).
2. Assess current supply chain capabilities. This involves formulation of a gap analysis to identify the
current and ideal future state of an organization in terms of its overall strategy.
3. Evaluate supply chain game-changers. This involves environmental scanning on a regular basis to
identify trends which may impact customers and the supply chain. Examples of trends include
supply chain collaboration, visibility, and sustainability among others.
4. Analyze the competition. This involves evaluating how integrated and responsive the
competition’s supply chain in specific areas such as product customization, bundling, labeling,
assembly, and packaging among others.
5. Survey technology. This involves identifying the newest trend that will bring optimum functional
and financial performance for the organization.
6. Deal with supply chain risk. This involves determining factors that may jeopardize the operations
of the supply chain. The following are the main types of external risks:
o Demand risks. These are caused by unpredictable customer demand. For instance, the
demand for a particular product suddenly rises due to social media popularity. This may
cause a gap between forecast and actual demand.
o Supply risks. These are caused by interruptions to the flow of product for raw material or
components, within the supply chain. For instance, a component in the production
suddenly becomes unavailable, causing a delay in the manufacturing process.
o Environmental risks. These are caused by economic, social, governmental, and climate
factors, including the threat of terrorism.
o Business risks. These include a supplier’s financial or management stability or purchase
and the sale of supplier companies.
o Physical plant risks. These are caused by the condition of a supplier’s physical facility and
regulatory compliance.
7. Develop new supply chain capability requirements. This involves developing a new roadmap for
the supply chain of the organization based on the following key indicators:
o Agility. It refers to the supply chain’s relative capacity to act rapidly in response to
dramatic changes in supply and demand.
o Adaptability. It refers to the willingness and capacity to reshape supply chains when
necessary.
o Alignment. It involves creating consistency in the interests of all participants in a supply
chain.
8. Evaluate current supply chain organizational structure, people, and metrics. This step requires an
evaluation of existing capabilities and identification of any gaps between currently available skills
and those needed to support end-to-end strategies.
9. Develop a business case. This step involves documenting the proposed changes in the supply
chain of an organization. The proposed changes shall target increase in organizational efficiency
and alignment of business activities, based on the critical evaluation of prior steps.
 Supply Chain Opportunities and Challenges
Hitachi Consulting (2009) identified the following market trends that may potentially benefit or harm the
supply chain of organizations:
 Demand planning. Companies are now leaning toward a “make what you sell” demand and are
trying to influence and manage demand better. Organizations that do not wrap their minds
around this will continue to struggle with meeting ever-increasing volatile demand, which in many
cases is caused by incentives and promotions resulting in producing or purchasing larger than
needed products in the supply chain, causing inefficiencies throughout.
 Globalization. Companies may capitalize on the benefits of globalization which include access to
more markets, a larger supplier pool, a greater selection of employees, and so on. On the other
hand, the supply chain network design must manage the changes brought about by globalization
in order to optimize the number, location, size, and type of facilities, and flow of materials
throughout the network.
 Increased competition and price pressures. Companies continually find better ways to distinguish
themselves due to commoditization of many products and services. This is the reason why most
companies strive to reduce cost and add value to their products and services. Some areas where
cost improvement can be found include transportation management, sales and operations
planning, strategic sourcing and procurement, and collaboration among others.
 Outsourcing. Some companies decided to outsource the logistics and supply chain functions. The
trade-off of risk and reward relevant to this initiative involves requiring a good supply chain
network design integration with the outsourcing partner in the information chain, control
mechanisms to monitor the various components of the supply chain, and information systems that
connect and coordinate the entire supply chain.
 Shortened and more complex product lifecycles. Companies have worked on improving their
product lifecycle management (PLM) processes due to increasing pressure to develop and
introduce new and innovative products quickly. Benefits of PLM to the supply chain include
processes and technology to design products that can share common operations, components, or
materials with other products. This can reduce the risk of obsolescence and reduce costs when
purchasing key materials.

References
Dittman, J.P. (2012). Supply chain transformation: Building and executing an integrated supply chain
strategy. New York: McGraw-Hill Education.
Hitachi Consulting. (2009). Changing supply chain management today. Retrieved August 27, 2019, from
https://enterrasolutions.com/media/docs/2012/10/WP_SCMTrends.pdf
Myerson, P. (2015). Supply chain and logistics management made easy: Methods and applications for
planning, operations, integration, control and improvement, and network design. United States:
Pearson Education, Inc.
Perez, H. (2013). Supply chain strategies: Which one hits the mark? Retrieved July 15, 2019, from
https://www.supplychainquarterly.com/topics/Strategy/20130306-supply-chain-strategies-
which-one-hits-the-mark