Logistics and Supply Chain Management, 4th Edition

LOGISTIC S & SUPPLY CHAIN MANAGEMENT

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A network of connected and interdependent organisations mutually and

co-operatively working together to control, manage and improve the flow of

materials and information from suppliers to end users.

SOURCE: J. AITKEN

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Competitive advantage

A central theme of this book is that effective logistics and supply chain manage-

ment can provide a major source of competitive advantage – in other words a

position of enduring superiority over competitors in terms of customer preference

may be achieved through better management of logistics and the supply chain.

The foundations for success in the marketplace are numerous, but a simple

model is based around the triangular linkage of the company, its customers and its

competitors – the ‘Three Cs’. Figure 1.2 illustrates the three-way relationship.

The source of competitive advantage is found firstly in the ability of the organisa-

tion to differentiate itself, in the eyes of the customer, from its competition, and

secondly by operating at a lower cost and hence at greater profit.

Seeking a sustainable and defensible competitive advantage has become the

concern of every manager who is alert to the realities of the marketplace. It is no

longer acceptable to assume that good products will sell themselves, neither is it

advisable to imagine that success today will carry forward into tomorrow.

Let us consider the bases of success in any competitive context. At its most

elemental, commercial success derives from either a cost advantage or a value

advantage or, ideally, both. It is as simple as that – the most profitable competitor

in any industry sector tends to be the lowest-cost producer or the supplier provid-

ing a product with the greatest perceived differentiated values.

Customers

Needs seeking benefits

at acceptable prices

Cost

differentials

Assets and

utilisation

Assets and

utilisation

Company Competitor

Value

Value

Figure 1.2 Competitive advantage and the ‘Three Cs’

Source: Ohmae, K., The Mind of the Strategist, Penguin Books, 1983

LO G ISTICS, THE SUPPLY CHAIN A N D C O M P E TITIVE STRAT E GY

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Put very simply, successful companies either have a cost advantage or they

have a value advantage, or – even better – a combination of the two. Cost advan-

tage gives a lower cost profile and the value advantage gives the product or

offering a differential ‘plus’ over competitive offerings.

Let us briefly examine these two vectors of strategic direction.

1 Cost advantage

In many industries there will typically be one competitor who will be the low-cost

producer and often that competitor will have the greatest sales volume in the

sector. There is substantial evidence to suggest that ‘big is beautiful’ when it

comes to cost advantage. This is partly due to economies of scale, which enable

fixed costs to be spread over a greater volume, but more particularly to the impact

of the ‘experience curve’.

The experience curve is a phenomenon with its roots in the earlier notion of

the ‘learning curve’. Researchers in the Second World War discovered that it was

possible to identify and predict improvements in the rate of output of workers as

they became more skilled in the processes and tasks on which they were working.

Subsequent work by Boston Consulting Group, extended this concept by demon-

strating that all costs, not just production costs, would decline at a given rate as

volume increased (see Figure 1.3). In fact, to be precise, the relationship that the

experience curve describes is between real unit costs and cumulative volume.

Traditionally it has been suggested that the main route to cost reduction was

through the achievement of greater sales volume and in particular by improving

market share. However, the blind pursuit of economies of scale through volume

increases may not always lead to improved profitability – the reason being that

in today’s world much of the cost of a product lies outside the four walls of the

business in the wider supply chain. Hence it can be argued that it is increasingly

through better logistics and supply chain management that efficiency and produc-

tivity can be achieved leading to significantly reduced unit costs. How this can be

achieved will be one of the main themes of this book.

Cumulative volume

Real costs per unit

Figure 1.3 The experience curve