The relationship between supply and demand according to the economic theory is what determines the pricing of commodities. Klein (1983) asserts that by understanding and meeting customer demands, giving the finest operational efficiency drives the need of customers. There is high competition in each industry and as such, there needs to be a proper analysis of the demand and supply. In a liberalized market, supply and demand are driving forces because the price automatically rises as demand increases for a certain commodity. The manufacturers can then act in response to the high price by manufacturing the item on demand in large quantities. The modern theory of economy proposes that there are various factors that may affect pricing apart from demand and supply such as marketing, advertising, monopolies, and regulations by the government.
The model used in determining and understanding how pricing of commodities is supply and demand. This model heavily relies on high competition. It simply means that there is a sufficient number of buyers and sellers available. Hence, bidding can take place. When buyers bid, the price is raised. There sometimes can be equilibrium, for instance when all bidding is done, no one can offer prices that are higher nor is anyone willing to accept prices that are lower. The perfect competition is when the number of buyers and that of sellers is almost equal. It means that a single seller or buyer can influence the prices alone. Imperfect competition, on the other hand, exists when one seller or buyer can influence the prices in the market. As such, the supply and demand ideology can only work best when there is competition. Though the market is not always competitive, it is a reflection of what often happens.
Quantity demand is the amount of goods that buyers want to purchase under certain conditions such as wealth and income of the buyer, availability and prices of complements and substitutes, preferences, and expectations among other factors. Demand could, therefore, be defined as ability and willingness to pay for a certain good (Adil, 2006).
Business activities in a company that is required to make, design, use and deliver a certain service or product are what encompass a supply chain. Every business depends on their set supply chains to give them what is needed to survive and thrive. Any operating business must fit in at least one supply chain or more, and each plays an important role. Change and uncertainty of what will happen in the market have become a necessity for companies and businesses to understand the type of roles they play. The companies that learn to effectively build and actively participate in supply chains that are strong have a competitive advantage that is substantial. Hence, they are ahead of others in the market. Supply chain management practice is usually guided by some concepts that have existed for centuries (National Association of purchasing management, 1999.
Napoleon who was a Skillful strategist said that an army would always march on with its stomach. He clearly understood what is today known as a supply chain that is efficient. He meant that the army soldiers could not move unless they were fed. It has also been said that while amateurs may talk of strategy, professionals will talk about logistics. It means that people may talk of everything from strategies they are to employ, and dashing maneuvers, but it is fruitless if they do not figure out how they will meet the daily demands. In Napoleon's case, the army would get their shelter, fuel, spare parts, ammunition and food among other things required for them to operate. The mundane activities, supply sergeants and activities of the quartermaster are what ultimately determine if the army is successful or not.
"Supply chain management" is a term that was largely used in the 1980s. Its use became widespread ten years later. Before that, businesses would use operations management and logistics among other terms. A supply chain is basically firms that are aligned to bring services or products for sale to the market. It contains all steps and stages that are either indirectly or directly involved to fulfill the request of a customer. The supply chain involves a lot of people ranging from the manufacturer or supplier to those who will transport the supplies, warehouses, wholesalers and retailers to the consumers who are the customers. Putting this in mind, it is clear then that this process requires proper management.
A supply chain could also be a network for facilities distribution. It performs functions such as material procurement and transforming the materials into finished products before distributing them to customers. Supply chain management then translates to the things that we do to influence what happens to the supply chain in order to get the desired results. Companies then employ strategic and systemic coordination of the business and other businesses that are involved in the supply chain to improve the performance of individual companies in the long-term and generally the whole supply chain.
Logistics traditionally refers to all activities that usually occur in boundaries of one organization while supply chain is simply networks that companies use to work together as well as to coordinate their activities of delivering a certain product to the market. The main focus of logistics is activities like distribution, procurement inventory management and maintenance. Supply chain management, on the other hand, includes certain activities like product development customer service, marketing and finance. These activities are needed to fulfill the needs and requests of the customer (Gammelgaard, 2011).
Supply chain management encompasses organizations and supply chain on the whole. It brings understanding to the system. Hence, one is able to coordinate the flow of products without hitches. It, in turn, brings satisfaction to the consumer of goods and services (MCB, 1996). This approach gives the right framework for responding to the requirements of the business that, if not harmonized, could be seen as conflicting. If supply chains are not harmonized, there can be conflicting needs. For example, in order to maintain high inventory levels, high level service calls to the customers are required. However, if a company has to operate efficiently, reductions in the inventory levels are required. They must be viewed from a broader perspective to make sense. To effectively manage a supply chain, improvements must be simultaneous in both the internal operating efficiencies and customer service, and in the supply chain of a company.
Customer service basically means that customers have access to fill rates that are consistent and of high order, that deliveries are made on time, and the ensurance that products are returned at a very low rate (Gribbstrom, 2002).
An organization's internal efficiency in the supply chain translates to the organization getting a good return on investments. When the company invents ways of reducing its operating costs and expenses from sales among other assets, profits are increased.
Though there are many patterns of supply chain management and each market has its own unique demands, the issues in the market basically remain the same. Most companies generally make decisions either collectively or individually in certain areas. Most decisions are made concerning production, inventory, location, transportation and information.
In terms of production, there are several issues that come to mind. The company has to note what type of products the market really wants. A business must identify the gap and deficit that exist in the market. Next step is to identify the quantity of products that should be produced within a given time. It should be done under the consideration that certain things may only be in demand for some time before the demand subsides. The company must then create a schedule for the product production. In the meantime, every company should consider the workload involved, the capacity, and the production of quality products while at the same time maintaining the company's equipment.
Another area of decision is inventory. There need to be inventories that are stocked in each stage of the supply chain. There need to be a specified number of inventories being held as semi-finished, finished or raw materials. The purpose of these is to prevent losses or to create a buffer in case things go wrong. There can be uncertainties along the supply chain. It does not come cheap. Hence, considering the amount of inventories that should be held, there has to be optimal levels of inventory and points of reorder. Cost saving would be achieved through inventory stocking in central locations. Responsiveness may also be achieved if the inventory is brought closer to the customers and made immediately available to them. A company should be able to open many locations that are close to the customer base. There can be efficiency if the company operates in few locations, but activities should be centralized in locations that are common. Some companies serve geographical markets that are large, but they do it from very few central locations.
Companies should also think where to put the facilities that are to be used in production and in the inventory. The management has to decide if the facilities to be used will be the new ones or whether they should be built. It is the decision that shapes the direction the product will take before it reaches the customer. Possible paths that the product will use are drawn at this point. Time has to be taken into consideration because if the product takes a long path, the profits may dip due to the inconveniences and hitches along the way (Chopra, 2001).
Transportation is also another point to consider. For example, the company decides what method of transportation will be used. For instance, truck delivery and air freight are fast and efficient means of delivering products, but they come at a high cost. Shipping inventories by rail or ship could be considerably cheap, but the transit time is much longer. Moreover, there are more uncertainties when they are used. Depending on the time available, the company should decide what form of transport it will use. If the decision is to transport the inventory by sail, many stocks of inventory should be stocked to reduce the risk. Being fast and reliable, transporting inventory brings responsiveness. Companies that sell their products through the Internet or use catalogs provide responsiveness that is of high level because they use transportation to efficiently deliver the products mostly in less than 24 hours.
Another essential area of thought is the amount of information to be collected and the amount of it that is to be shared. The collected information has to be accurate and timely. Any inaccurate information can cost the company because wrong decisions can be made, which may reduce profits. Accurate information promises better coordination and better decisions can be made. Perfect information is needed before one can decide what type of product to produce, how much and at what cost. With information, one is able to know the best place to get the inventory, the best mode of transportation among other factors. This information is crucial and a single mistake can lead to serious consequences.
All these decisions, in the end, will have an effect on the supply chain. These decisions will actually show if the company is capable of achieving set objectives as well as testing the effectiveness of its supply chain. The success of a company and standing out from the rest of the competitors really depend on how effective the supply chain is. For example, if a company is set on serving a large market base and uses low prices as its basis, the best thing for the company is to find or formulate a supply chain that also optimizes low costs. If on the other hand, a company wants to make an edge by offering customer convenience and service, the company is better to be placed to get a supply chain that optimizes responsiveness. What a company becomes and how it works are largely shaped by the type of market it serves and the supply chain it uses.
Production is a concept that needs to be discussed broadly. It is the supply chain's capacity to manufacture and pile up products. Facilities used in product manufacturing include warehouses and factories. The basic decision that managers must make is how to separate responsiveness from efficiency. Factories that are made with a large capacity are very flexible and can be used to give rapid response to swings in the market, especially where a certain product is in high demand. Warehouses or factories that are used most of the time in full capacity are not likely to be efficient when there are demand fluctuations. As much as setting up spacious production houses is a good strategy, it requires resources to be set up. At the same time, when there is no high demand, the facility is idle and does not generate any revenues. In short, it means that with the presence of the excess capacity, operation of the facility is less efficient.
Factories could however be built in order to accommodate one of the approaches called functional focus and product focus. The latter involves a factory performing various operations that are required to make a certain product line through different parts of product being fabricated in order to assemble the parts. Functional focus, on the other hand, focuses on performing the minimum number of operations like doing only assembly or concentrating on certain parts. Product focus generally helps the staff to gain expertise in certain tasks or certain products. Functional approach is about the expertise of particular functions rather than of certain products. Companies should choose the method that best suits them or the mix of the two obtaining the expertise they require to respond well to the needs of the customers.
It is possible to build warehouses using certain approaches. The main approaches are job lot, cross-docking and stock keeping storage. In stock keeping, the product is stored in one place. This way, you are able to understand the way products are stored. Job lot kind of service is another approach presupposing that products one or another way related to the requirements of a certain customer or a particular job are usually stored together. This way, products can be efficiently picked and packaged. However, this type of storage requires more space for storage than the stock keeping. Cross-docking is used to provide efficiency in the supply chain. It was started by Wall-Mart to reduce time waste. The products are not stored in a warehousing facility (Institute of supply management, 1990).
Participants involved in a supply chain will always look forward to maximizing their performance. Those participating in the supply chain make decisions that ultimately affect the management of the five drivers in the supply chain. Every organization will try to get as much as possible from the divers of the chain through partnerships, outsourcing, and training of the in-house staff. In a fast growing market in the deteriorating economy, most companies will only focus on the core competencies in supply chain management while the rest will be outsourced. In mass markets that are still in the industrial age, most successful companies will usually attempt to create or have their own supply chain. This concept is referred to as vertical integration. The main aim of this is to get maximum efficiency through owning much of the supply chain.
A simple supply chain only has suppliers and the consumers of the product. There are customers at the end of every supply chain. Big companies have wholesalers or distributors, companies that buy from them, retailers and other companies that offer finance, logistics, information technology and marketing. Supporting companies that are not self-sufficient will require other companies in order to deliver their products to the consumers.
Producers are the companies that make the product. This notion entails companies that give either raw materials or finished goods. Those that sell raw materials are the ones that look for raw materials or mine, cut timber, drill for gas or oil and minerals. This list contains people who raise animals, hunt for sea or forest food. Those companies that create finished products for the customers use subassemblies and raw materials that are made by other producers so an order to create a new product. Other producers create products that are not tangible like entertaining movies, music or design of certain software. Some other products could be viewed as services. An example is a company that is outsourced by some company to give cleaning services to another company. Producers that give tangible services are most likely found in areas where labor is less expensive. In developed countries, for example, there is more production of services and items that are not tangible.
Distributors constitute another part of the supply chain. They take inventory in large numbers from the customers. They could also be referred to as wholesalers. They basically sell products to other businesses, but usually in quantities that are larger than what one customer would purchase. They generally cushion the producer from experiencing fluctuations in products. They do the sales, stock inventory and give services to the customers. Distributors' work is to get the products for the customer at any time he/she needs them.
Any distributor will take care of the inventory of products from various organizations. Functions performed by distributors include conducting sales and promoting certain products, managing the inventory, managing operations in the warehouse, transporting the product and giving after sale services to clients. A distributor can decide to be a broker and to be involved only in selling the product or convincing customers. However, they may decide never to buy the said product. The work of the distributor is basically to find out what client wants in order to deliver him/her the service or the product.
Retailers stock inventory brought by distributors. They divide the goods into small quantities that can then be distributed to the consumers. Retailers are very careful to stay relevant and bring products that are of use to the consumer or those that are in demand. Retailers are well aware of the customers' preferences and they understand their demands. The advertisement is mainly used to attract consumers. Several other strategies such as product selection, price lowering, convenience, and quality services are the factors that attract customers to a certain product. When customers are attracted, sales are made. For example, most fast food restaurant use convenience as their weapon or strategy to draw customers' attention who end up buying the product.
Any organization must have consumers or customers. These are people who purchase the product either for their use or for sale. Consumers are the ones who create the demand for certain goods hence making the producer act to satisfy the demand. Customers constitute an important part of the supply chain that must not be ignored.
Service providers constitute another integral part of the supply chain. They give services to the whole system. For example, distributors, producers and consumers get their services from supply providers because they have developed expertise and have the required skills that are focused on the consumers' interests. Since they have amassed experience, their services are more effective and often beat the services offered by most retailers, distributors and producers.
Common service providers in many supply chains are transport services or warehousing services. Trucking companies provide logistics allowing moving goods from one place to another. Providers of financial services give loans, do credit analysis and collect invoices that are due. They include banks, collection agencies and companies that deal with credit analysis. Some providers offer market research, advertising, engineering services, product design, legal services and advice on managing finances. Other providers give information about technology and services such as data collection. These service providers play different roles in the operations of the consumers, retailers, producers, distributors along the supply chain. Some may affect operations to a great extent while others may be affected minimally. Supply chains have repeating participation that may fall in either of the categories.
A company must be able to line up the supply chain with the strategy of the business. The supply chain plays a major role in determining how the company will respond to the market it is serving. The supply process should match the business strategy of the company. A company that delivers efficiency and responsiveness is likely to gain more market share in comparison with other companies, which will result in increased profits.
In order to align the supply chain to match the business strategy, several steps must be followed. They include an understanding of the market, defining core competencies and their strengths. It is only then that the company can identify the role that you can play. The third step is to identify the amount of supply needed and the capacity for your company to be able to play the best-suited roles effectively.
In order to understand the market, you need to understand the customers. There needs to be an understanding of the part of the supply chain where your company is placed. To help to identify the client's needs, you need to understand certain attributes such as the quantity needed to fulfill the customer's needs. For example, do the customers buy the products in large amounts or in small amounts? One must also consider the response that customers can tolerate. You should consider the amount of time before they can expect the service. It will help you in planning how to avoid disappointing the customers. You should also take into consideration the variety of products that have been requested for. You should consider if it is a specific defined product or products that have a wide selection. Another consideration is the level of service that is required by customers. You should establish if they expect the products immediately or through partial deliveries at intervals. For example, those who want their products custom made may have to wait for some time before their products can be delivered (Institute for supply management, 1999).
Another consideration is the product price. You should determine if customers are willing to pay the set price. Customers may want to pay much more to get what is convenient for them. Most clients though go for the lowest price for the best product. In order to stay relevant, you should determine the rate at which products become irrelevant in the market. For example, if your company deals with computers or electronics, a lot of innovation takes place in those sectors. Hence, if you produce more than the market can take, there will be surplus products that will become obsolete. If, on the other hand, you deal with areas that have less innovation requirement, for example, the paint industry, it may take quite some time for the paint product to become obsolete.
Defining the competencies in your company entails defining the role played by your company. It is important to understand the kind of participation required by your company. You should define which class your company falls under. It could be retailers, producers, distributors or service providers. You should define what the company does in order to perform your part of supply chain. Questions such as how the company makes money need to be answered. It will help to identify roles that best suit your company in the supply chain.
The company can serve different roles, serve a variety of markets as well as participate in many supply chains. For example, a company may operate in operations, maintenance and repair. Products may be sold to both large consumers and to small businesses that then sell them to the consumers. Two types of markets are very different, and the customer attributes in each are different. It must be put into consideration in order to succeed in both. The company needs ways of leveraging the core competencies. It may come as a surprise that some parts of the supply chain are unique to the specific market segment and may not apply in another segment while, at the same time, some parts may be used to help in achieving the economy of scale. For example, if the company's core competency lies in manufacturing, there can be a variety of products that are different. Transportation and inventory options may be used to distribute those products to different customers in different segments of the market.
After your role has been clearly identified, the last step is to develop the capabilities of the supply chain. It is necessary for making decisions concerning the drivers of the chain supply. The drivers of chain production such as production, inventory, information, location and transportation are important in driving the change.
While trying to coordinate the activities in a supply chain, the most common challenge is experiencing a bullwhip effect. It is a tendency that increases as one moves up through their supply chain and demand variability increases. Variability is problematic and is a threat to effective operations. Another challenge could be the coordination of the supply chain originating from incentive conflicts due to the independence of firms in the supply chain. For example, a certain action may improve the profits of one firm but have a negative effect on the other (Zuckerman, 2002).