Introduction
This paper is an attempt to discuss the notions of trade-offs between working areas of logistics, the relationship between the selection of location networks and competitive advantage, and logistics value proposition within the broader framework of supply chain management. It starts by giving an idea of what supply chain management is all about as it is pertinent to the understanding of the aforementioned notions.
Bowersox et al., (2008, p.5) view supply chain management as embracing the elements of planning, execution, controlling, and managing the processes of sourcing, procuring, and the provision of products and services required by customers. Bowersox et al (2008) describe the supply chain as a process that spans from distribution of raw materials to an organization, “conversion of raw materials to processed goods up to the final dispatch of the processed goods to the consumer.” This process also involves concerted coordination with other people along the supply channel such as suppliers, intermediaries, and customers.
Trade-offs in Logistics
The supply chain management process may be simple or complex depending on the variables involved as well as the logistics required in the supply chain. Logistics, as Bowersox et al., (2008, p.6) further state refers to the way an organization organizes itself about transport, warehousing, customer service, and order processing or information systems costs. These, then are the working areas in logistics, and taken in another way, there are cost implications in these variables otherwise known as logistics costs.
The supply chain management approach “View trade-offs as a possible strategy of minimizing total costs given customer service level objective” as Bowersox et al (2008) contend. Trade-offs refer to the act of balancing two things that one needs but are opposed to each other, to ultimately pick the best option.
The common trade-off is to achieve the lowest logistical cost. However, total costs may increase if only one of the activities is given prominence. We illustrate with a trade-off existing between transports and warehousing in an organization dealing with a wide range of consumer goods. Frazelle (2002, p.42) considers “trade-off as a strategy to minimize the number of warehouses thereby increasing the use of transportation or the other way round”: increasing warehouses but reducing the use of transportation. Our case in point is one of the Unilever franchises, Unilever Kenya limited.
If the management closes down two of its warehouses in two towns, there will be an increase in the transportation costs, but a reduction of warehousing costs. More use of transport will be involved in transporting goods from the remaining warehouses to the towns which previously had warehouses. More personnel will also be involved in covering the destinations which were previously served by the closed warehouses.
If on the other hand, a consideration is made to increase more warehouses, there will be a reduction of the costs of transportation due to the proximity of goods to consumers. This trade-off, at first would seem to achieve the cost reduction objective. However, in the long run, costs may inevitably soar. There is likely to be a rise in transport cost contrary to the initial aim of overall cost reduction. This is because of inbound and outbound transports: from one warehouse to another, then from the same warehouse to retail outlets, and so on. Similar trade-offs can also be worked in the other areas of logistics.
Location Network and Competitive Advantage
So far this paper has illustrated one trade-off in logistics areas.
It further explores how the selection of a superior location network can create a substantial competitive advantage. It is important to have an understanding of the concept of competitive advantage before embarking on ways it can be achieved through the selection of a location.
When a firm can outperform others who are carrying out the same business, then this firm is said to have a competitive advantage. The meaning of competitive advantage is espoused in the theory that Porter (1990, p.200) in Bowersox et al, (2008, p. 30) propounded. The practice emphasizes that governments and business enterprises should formulate business policies that improve the value of goods to fetch good prices. The main idea, he argues, is a firm’s ability to acquire the resources to outperform other competitors in the same industry. Therefore, the strategies used by a firm seeking competitive advantage should be unique, relevant, and sustainable.
Competitive advantage is measured when a firm sustains profits that are higher than its investments. One way a company can achieve a competitive advantage is through manipulating its unique resources using available business strategies. Bowersox et al, (2008, p. 34) give some of the ways of gaining competitive advantage which include access to natural resources, availability of trained and skilled human resources, and a superior location network. The location of a business is by far and large key to a business’s growth and profit-earning potential.
They further assert that the selection of a location should involve a consideration of the prospects it offers a business. Therefore, there is a need to research other players in the same area. In line with this, market research on customer purchase behavior and propensity are important while seeking this advantage.
A review of supply chain management points to the involvement of such processes as sourcing raw materials, processing them into finished goods, and moving them near the consumer. Such processes, as already seen above, involve the logistics of transportation, warehousing, customer service, and order service. The interplay of these variables, implicitly, is important in determining the location of a business which in turn creates a competitive advantage (Frazelle, 2002, 46). We also saw that the supply chain includes strategic partners such as suppliers and customers. When these partners are local to each other about the business location, there is an advantage. Such a location keeps one up to date on raw materials and the market. There is, for instance, an advantage in locating a business near the source of raw materials for more accessibility. More time and money will be spared thus giving the business more competitive advantage than its competitors.
The location of warehouses and other outlets, say near customers, can also minimize transit time and expenses, hence helping in sustaining profits. Customers will opt for goods or services that are nearer them; for instance, in an agriculture economy, the location of a fertilizer warehouse in the country areas is more feasible than one in town. This is so because there is a ready outlet on the nearby farms.
In addition, the availability of human resources, trained and skilled, near the business networks can offer an advantage. The cost of transporting and housing employees is reduced due to employees’ proximity to work and the fact that they already have houses respectively. Therefore, more money will be channeled to business.
Logical Value Proposition
The preparation of a logical value proposition is an implicit process in supply chain management. It is embedded in the process of movement of the finished products or services nearer the consumer (Frazelle, 2002, p.44). Value proposition involves convincing both the current and potential customer to opt for the goods and services one’s organization offers with the ultimate intention of proving that they (products and services) are better than their competitors’ offerings. In other words, these are ways an organization exploits in its endeavor to achieve a competitive advantage. Once an organization has gained a customer’s attention and approval, faster sales, more profitability, and increased market shares are bound to result.
The value proposition is a summary statement indicating why a customer should buy a product or use a service (Bowersox et al, 2008, p.14). The bottom line is to convince potential consumers that a certain product or service has more value or is a better solution to a problem than others of the same industry or offering. The value here is not perceived in monetary terms; rather, it is that which matters to a customer. This statement indicates explicitly the organization’s capability, the impact or difference this capability makes, the evidence that the capability will realize the impact it prides on, and the cost or risk of this capability and impact. This implies that an organization devises formal mechanisms of making a potential customer see the benefits, costs, and values it can deliver to him or her. At this juncture, it is worth noting that the focus of the value proposition is on the potential customer rather than either the employees, suppliers, or partners.
Bowersox et al, (2008, p. 18) demonstrate how the value proposition is created using a model they refer to as value proposition builder. Their emphasis is on the target market (the specific people being created for a value market); the customer’s experience or accommodation (what a customers value and their exact feedback); a specification of the product or service being offered; the benefits associated with it; alternatives and the difference the product exhibits from others on offer and proof of executing what the organization says.
The logical proposition rests on the premise that an organization should have a thorough knowledge of both its potential and current customer base (Bowersox et al., 2008, p.14). It also needs to be clear, concise, and convincing. This means that the value proposition must accommodate or reflect the customer’s experience in many ways, with a consideration of the low price being fundamental. This does not mean too much reduction of price on the goods and services as the confidence of the customer on the quality of the goods will be eroded.
According to Bowersox et al., (2008, p. 16) an organization can accommodate its customers in its value proposition in several ways. Firstly, the organization should know its targeted customers along with their needs and desires; secondly, it should talk to current customers to understand the product’s value from their points of view. Thirdly, it should know its competitors’ strength on the same product. Finally, the value proposition statement should be updated with current market trends with the help of others in the organization as well as potential customers. Customers need to be given the best value for their money to satisfy their needs.
Conclusion
In conclusion, this paper has demonstrated one trade-off in logistics, explored the selection of a location network concerning the accruing competitive advantage, and expounded on the logistics value proposition. The notions explored derive from the broader spectrum of supply chain management.
Reference List
Bowersox, D., Closs, J. and Cooper, M., B. (2008). Supply Chain Management. New York: McGraw Hill Companies, Inc.
Frazelle, E. (2002). Supply chain strategy: the logistics of supply chain management. New York: McGraw Hill Companies, Inc.