SCLM/U2 Topic 4 Gaining Competitive Advantage through Logistics Management
Effective logistics management can provide a major source of competitive advantage. The bases for successes in the marketplace are numerous, but a simple model has been based around the three C’s – Customer, Company & Competitor. The source of competitive advantage is found firstly in the ability of the organization 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 competitive advantage has become the concern of every manager who realizes the realities of the marketplace. It is no longer acceptable to assume that the goods will sell themselves. An elemental, commercial success is derived either form a cost advantage or a value advantage or, ideally both. The greater the profitability of the company the lesser is the cost of production. Also a value advantage gives the product an advantage over the competitive offerings. Successful companies either have a productivity advantage or they have a value advantage or maybe a combination of the two.
There are two main vectors of strategic direction that need to be examined:
- Productivity Advantage
In many industries there will be a competitor who will be a low cost producer and will have greater sales volume in that sector. This is partly due to economies of scale, which enable fixed costs to spread over a greater volume but more particularly to the impact of the experience curve.
It is possible to identify and predict improvements in the rate of output of workers as they become more skilled in the processes and tasks on which they work. Bruce Henderson extended this concept by demonstrating that all costs, not just production costs, would decline at a given rate as volume increased. This cost decline applies only to value added, i.e. costs other than bought in supplies. Traditionally it has been suggested that the main route to cost reduction was by gaining greater sales volume and there can be no doubt about the close linkage between relative market share and relative costs. However it must also be recognized that logistics management can provide a multitude of ways to increase efficiency and productivity and hence contribute significantly to reduced unit costs.
- Value Advantage
It is a cliché that customers don’t buy products they buy benefits. These benefits may be intangible i.e. they relate not to specific product features but to such things as image and reputation. Unless the product or service that we offer can be distinguished in some way from its competitors there is a strong likelihood that the marketplace will view it as a ‘commodity’ and so the sale will tend to go to the cheapest supplier. Value differentiation can be gained in numerous ways. When a company scrutinizes markets closely it frequently finds that there are distinct value segments. In other words different groups of customers attach different levels of importance to different benefits. The importance of such benefit segmentation lies in the fact that often there are substantial opportunities for creating differentiated appeals for specific segments. Adding value through differentiation is a powerful means of achieving a defensible advantage in the market. Equally powerful as a means of adding value is service. Increasingly it is the case that markets are becoming more service sensitive and this poses a challenge in management of logistics. It is important to seek differentiation through means other than technology. A number of companies have responded to this by focusing upon service as a means of gaining a competitive edge. Service in this context relates to the process of developing relationships with customers through the provision of an augmented offer. This augmentation can take many forms including delivery service, after sales service, financial packages, technical support and so on.
In commodity market situations where a company’s products are indistinguishable from their competitors’ offerings the only strategy is to move towards being a cost leader or towards being a service leader. Often the leadership route is not available. This particularly will be the case in a mature market where substantial market share gains are difficult to achieve.
Cost leadership strategies have been based upon the economies of scale, gained through greater volume of sales. This is why market share is considered to be so important in many industries. This cost advantage can be used strategically to assume a position of price leader and make it difficult for high cost competitors to survive. This cost advantage can come through effective logistics management. In many industries logistics cost represents such a large part of total costs that that it is possible to make major cost reductions through fundamentally reengineering logistics processes.
The other way to come out of the commodity quadrant of the matrix is to seek a strategy of differentiation through service excellence. Customers ion all industries are seeking greater responsiveness and reliability from suppliers; they are looking for reduced lead times, just-in-time delivery and value added services that help them do a better job of serving their customers.
GAINING COMPETITIVE ADVANTAGE THROUGH LOGISTICS
A firm can gain competitive advantage only when it performs its strategically important activities (designing, producing, marketing delivering and supporting its product) more cheaply or better than its competitors.
Value chain activity disaggregates a firm into its strategically relevant activities in order to understand behavior of costs and existing and potential sources of differentiation. They are further categorized into two types
(i) Primary: inbound logistics, operation outbound logistics, marketing and sales, and service
(ii) Support: infrastructure, human resource management, technology development and procurement
To gain competitive advantage over its rivals, a firm must deliver value to its customers through performing these activities more efficiently than its competitors or by performing these activities in a unique way that creates greater differentiation.
Logistics management has the potential to assist the firm in the achievement of both a cost/productivity advantage and a value advantage. The under lying philosophy behind the logistics concept is that of planning and coordinating the materials flow from source to user as an integrated system rather than, as was so often the case in the past, managing the goods flow as a series of independent activities. Thus under a logistics management regime the goal is to link the marketplace, the distribution network, the manufacturing process and the procurement activity in such a way that customers are service at higher levels and yet at lower cost.