Unit 2 : Power shifts in the Modern Supply Chains

1. Faculty of Management Sciences Facilitator/Lecturer: Ms. Ester Kalipi (M.LSCM.; B. Hons Logistics; B-tech. BA.; Dip. BA.; Cert. BA.) Introduction to supply Chain Management (ISM511S) Unit 2: Power shifts in the Modern Supply Chains 20 February 2018

2. Table of contents • Objectives of the lesson • Power shift in supply chain • Provision of Goods/services (meeting the six “rights”) • Right Quantity • Right Goods • Right Place • Right Time • Right Condition • Right Price

3. Objectives of the Lesson • By the end of this unit, students should be able to: • Discuss the economic power shift in supply chains; • List the benefits of economic power shift in the supply chains; • Explain what is meant by the provision of goods/services meeting the six rights.

4. Power shift in the supply chain • In the past, before 18 century: • Suppliers dominating activities in supply chains or distribution channels • Suppliers had control over supply chains – designed, produced, promoted and distributed as they wish • Suppliers, wholesalers, distributors & retailers were smaller in size and depended strongly on the leadership of larger manufacturers. • During the 18 & 19 century: • significant change in economic power in various supply chains • trend of retail consolidation (synergy), resulting into power shift leading to a competitive strategy of lowering prices. • Change of the old logistics and supply chain strategies resulted from a need to shiftin the balance of economic power • This strategy focused on distributing systems of manufacturers that have a tendency of treating their customers similarly and not paying attention to fulfilling orders strategically affecting the efficiency and effectiveness of retailers. And this increased operating costs for retailers.

5. Power shift in the supply chain (Cont’d..) • Transformation took place • Retailers putting pressure on manufacturers in the SC to force them to change their logistics and SC strategies and include the needs of their consumers, because they contribute to a large amount of earnings. • Leading to improved logistic systems and SC operations, making a great impact in the efficiency & effectiveness of retailers. • Large retailers are now more demanding and commanding for the interest of consumers. • Focus upon distribution costs and their impact on “everyday low prices”. • Information technology provides new and unrestricted access to the place aspect of business and Warehouse technology has changed dramatically with computer devices in use from the office space to the forklifts. • Deregulation -Changing economic controls empowered creativity and competition. • Changes in transportation – fewer or no economic controls over rates and services. • Change in financial institutions blurred traditional differences and increased competition. • Change in the communications industry also resulted in more competition.

6. The Changing Business Landscape: Five Driving Forces 1. The Empowered Consumer • Impact on logistics is more direct. • Informed consumers have low tolerance for poor quality in products and services. • Changing demographics commands 24/7 service, become less royal • Increased customer service increases the importance of logistics and supply chains. Management of Business Logistics, 7th Ed.

7. The Changing Business Landscape: Five Driving Forces 2. Power Shift in the Supply Chain • Large retailers more demanding and commanding. • Focus upon distribution costs and their impact on “everyday low prices”. • Changing logistics and supply chain strategies resulted from shifts in the balance of economic power. Management of Business Logistics, 7th Ed.

8. The Changing Business Landscape: Five Driving Forces 3. Deregulation (4 main legs) • Changing economic controls empowered creativity and competition. • Changes in transportation – fewer or no economic controls over rates and services. • Change in financial institutions blurred traditional differences and increased competition. • Change in the communications industry also resulted in more competition. • Changes in the utility (energy) industry allows more competition. Management of Business Logistics, 7th Ed.

9. The Changing Business Landscape: Five Driving Forces 4. Globalization • Global marketplace concept • Global network sourcing, manufacturing, marketing and distribution • Global alternatives have blossomed • No geography --- access available to the world • Supply chain challenges • Wal-Mart’s challenges • New supply sources Management of Business Logistics, 7th Ed.

10. The Changing Business Landscape: Five Driving Forces 5. Technology • Information Age provides new and unrestricted access to the place aspect of business. • My time, my place • Warehouse technology has changed dramatically with computer devices in use from the office space to the forklifts. Management of Business Logistics, 7th Ed.

11. Five Main Characteristics of Supply Chain Management 1. Inventory • Visibility – managing flow and reduce or eliminate uncertainty • Pull systems – response to demand as opposed to pushing it to advance of demand 2. Landed Cost • Companies must realize that their strategies may affect the landed cost – ie the final cost • Coordination of supply chain activities may lower the landed cost. Management of Business Logistics, 7th Ed.

12. Five Main Characteristics of Supply Chain Management 3. Real-time two way information flows 4. Customer service • levels must be tailored to each customer – not to treat all customers the same • not all customers require the same service – need to cater the special need of individual customers 5. Supply chain relationships • Collaborative planning • Share risks and rewards Management of Business Logistics, 7th Ed.

13. Power shift response trends

14. Power in the modern Supply ChainsPower and Dependence

15. Power in Supply Chain Power in the supply can be defined operationally as the ability of one entity in the chain to control the decision of another entity. It is generally agreed that the power base has shifted over time from suppliers to retailers. Power is at the heart of all business-to-business relationships (COX, 2001). In fact, power can be considered as one of the strongest and influential tools for supply chain management . French and Raven (1959) And Raven and Kruglanski (1970) identified six types of Power Reward power Coercive power Referent power Legitimate power Expert power Informational power

16. Six Types Of Power Coercive power: enables an individual to punish others. In the supply chain network context, it reflects the fear of a network member to be punished if it fails to comply with the requirements of the focal company. For example, to dismiss, suspend, reprimand them, or make them carry out unpleasant tasks. It is usually based on the expectation of punishments and/or threats and relies on the belief that punishments will be forthcoming or rewards will be withheld unless the requested behaviour is exhibited Legitimate power stems from a legitimate right to influence and an obligation to accept this influence. In this case, a focal actor is recognized in the eyes of the network members as having a right to make specific decisions. Referent power depends on an ability to be attractive to others and depends on the charisma and interpersonal skills of the power holder. In the supply chain context this power is observed when network actors want to join a network.

17. Power in the Supply Chain conti.. Expert power is derived from the skills or special knowledge of a particular subject. Within a supply chain network, the expert power of a focal company can be achieved if the network actors believe that it possesses a special knowledge which is valuable to them. For example, manufacturers are often expected to have special knowledge about new products and promotion to assist the dealers. Reward Power: depends on the ability of the power holder to offer rewards to others. If a focal company has access to resources which are valuable for other network actors, it can make these network actors perform in a desired way.

18. Informational Power stems from the ability to explicate information not previously available and the ability to demonstrate the logic of suggested actions with this information (Raven and Kruglanski, 1970). The difference between expert and information power is that, the power holders tend to be well-informed, possess up-to-date information and, therefore, can persuade others. The difference between these two kinds of power could be observed when the holder of the expert power may develop credibility and trust through hid image and respect (for example, a doctor has an expert power over his patients), while the holder of the informational power may not. This kind of power does not demand to be a professional or an expert, but rather requires possession of new and up-to-date information and provides confidence to the power holder in debating. For example, if a retailer has new information about the consumer demands, then it can persuade suppliers to deliver their products and become a part of a supply chain network.

19. Provision of Goods/services (meeting the “6 R(s)”) • Meeting the customer requirements entails:, • Doing everything correctly in the supply chain – no mistakes are allowed • i.e. doing it right the first time • Aim is provide quality service and satisfy customer, because this is the main motive of doing business • Third stage of Supply chain evolution today: • Shift from supplier centred to being customer centred, • allowing ideal performance in our supply chain as Logistics and Supply chains adds value to a product by moving goods to points where demand exists, moving goods to points at a specific time, • Allows for economic development, increasing product accessibilities and ensuring the availability of the Right Quantity; Right Goods; Right Place; Right Time; Right Condition and Right Price.

20. Right quality • Zero defects • Products of services produced does not condone to re-work, waste or non-conformance • No level of defects is acceptable • Every mistake, every delay & misunderstanding directly cost a company money • Get it right first time • Zero defects – firms aspire & strive to achieve than a practical approach

21. What is the right price? • Price is defined as the value of a commodity or service measured in terms of the standard monetary unit (Lysons & Farrington). • Price is what a supplier charges for goods or services. • So what is the right price?

22. Right price from supplier’s perspective(right sales price) • A price which ‘the market will bear’ • A price which allows the seller to win business in competition with other suppliers. • A price which allows the seller at least to cover its costs, and ideally to make a health profit which will allow it to survive in business and to invest in growth

23. Right Purchasing Price • Price which the purchaser can afford • A price which appears fair & reasonable, or represents value for money, for the total benefits being purchased. • Price which gives the purchaser cost quality advantage over its competitors, enabling to compete more effectively in its own market • Price which reflects good sound purchasing practices

24. Buying Price (Cont’d..) Perhaps the most obvious aspect of purchasing. But, an effective purchaser MUST understand: The “TOTAL ACQUISITION COST” & The “TOTAL COST OF OWNERSHIP” This means appreciating “THE PRICE / COST ICEBERG”!

25. Purchasing~ The Price / Cost Iceberg Bailey P, Farmer D, Jessop D, & Jones D, Purchasing principles & Management,, FT Management, (8th Ed.1998)

26. Right quantity?Right Place?Right time?Right Condition?