Hiraina Tangiora Lincoln University New Zealand PMA ANZ Career Pathways Program Essay: Supply Chains Modern Wholesaler Supply Chains and Vertical

Transcription

1 Hiraina Tangiora Lincoln University New Zealand PMA ANZ Career Pathways Program Essay: Supply Chains Modern Wholesaler Supply Chains and Vertical Integration Friday, 5 June 2015

2 Table of Contents Executive Summary... 3 Introduction... 4 Modern Wholesalers... 4 Vertical Integration as a Competitive Advantage... 5 Conclusion... 5 Actions/Recommendations... 6 References

3 Executive Summary There have been dramatic changes in the supply chain of wholesalers over the past ten years, as they are now faced with the challenges of increasing costs, greater competition, demanding customers and tiny margins. The greatest challenge wholesalers face in today s dynamic business environment however has remained the same. Inventory still poses great challenges for wholesalers, as they are constantly trying to balance having too much inventory on hand to will satisfy customer demand but imposes extra costs and risks, with having too little inventory which reduces costs but can lead to loss of customers and revenue as a result. Firms who effectively implement supply chain systems are noticeably more successful than those who do not. A new focus for wholesalers is to stock small amounts of inventory, before transporting products to the customer as quickly as possible. Accurate forecasting, execution of appropriate vendor management programs, keeping low levels of safety stock and buying inventory only when it is needed are all useful ways of dealing with the challenges of dynamic economic conditions. There is an increasing trend towards wholesalers becoming more vertically integrated, as firms look to gain more control over crucial resources and improved quality of products. Vertical integration can act as a competitive advantage for firms as it provides multiple benefits, including decreased transaction costs, greater supply chain coordination and increased market share. 3

4 Introduction The supply chain of wholesalers has dramatically changed over the past ten years. Wholesalers are now faced with increasing costs, more competition, demanding customers and small margins. Inventory still presents a large challenge for wholesalers, constantly having to balance holding too much which increases costs and wastes resources, and holding too little which can lose customers. Effective implementation of supply chain management often separates successful distribution firms from those who struggle (Bursa, 2012). The new focus for wholesalers is to effectively buy and have in stock as minimal inventory as possible whilst quickly sourcing, shipping and delivering products to the customers. In the dynamic economic conditions we face today, all wholesalers must consider implementing accurate forecasting, executing vendor management programs, reducing levels of safety stock and only buying inventory when its actually needed (Bursa, 2012). There is also an increasing trend towards wholesalers becoming vertically integrated to reduce costs and retain control, which has proven to benefit firms in the long-term and acts as a competitive advantage (Jurevicius, 2013). Modern Wholesalers Modern wholesalers face increasing challenges from the business environment. Accurately forecasting market demand is crucial to a firm s success in today s business environment, in ensuring they are able to increase margins, though this becomes more difficult for them because they lack immediate access to customer demand patterns. Due to this, advanced forecasting capabilities anticipating future inventory needs based on demand history, previous orders and the introduction of new product lines (Bursa, 2012). With the implementation of strategies intended to increase profits, wholesalers may also require their distributors to provide various programs that require solutions and processes to anticipate customer replenishment demands and time-phased inventory (Bursa, 2012). As excess inventory can cause extreme discounting, write-offs and obsolescence, too little can cause dissatisfaction among customers and therefore lead to loss of business and sales revenue. With the margin improvements and introduction of value-added services, wholesalers must establish alternative methods for controlling inventory levels. The old 4

5 approach of setting inventory holding targets is no longer appropriate in today s business environment (Bursa, 2012). Due to the bargaining power of buyers being strong in many industries, the key driver is generally always price. As firms are managing broad inventory portfolios and keeping track of a large number of stock keeping units, there is a large emphasis placed on buying at a good price. Optimising procurement allows for an organised view of information, for example how much inventory is currently on hand, what has been ordered and the status of incoming products in a way that buyers cannot do manually. This therefore allows firms to make informed decisions around quantity price breaks and excess inventory (Bursa, 2012). Vertical Integration as a Competitive Advantage Vertical integration is a corporate level strategy that firms use to gain control over suppliers, or distributors, in an attempt to increase their marketplace power, reduce transaction costs and gain security of supplies and distribution channels. It involves the merging of two businesses at different levels of production, either towards the supplier, known as backward integration or towards the consumer, known as forward integration (The Economist, 2009). Vertical integration can provide many benefits for wholesalers, and is often viewed as a key component to remaining successful. The main benefits of vertical integration include; elimination of transaction costs, an improved quality of supplies, the acquisition of critical resources, greater coordination throughout the supply chain, increased market share, secured distribution channels, new competencies and greater investment opportunities (Jurevicius, 2013). Though vertical integration has risks associated with it, for example the complexity involved in implementing it, its initial expenses and the fact that it is hard to reverse, when risks are adequately assessed it can be extremely beneficial for firms (Stuckey & White, 1993). Conclusion Over the past ten years there have been significant changes to wholesalers and their supply chains, and they are constantly facing the challenges associated with being in a competitive industry. Successful implementation of supply chain management systems is often what separates wholesalers who succeed from those who struggle. Supply chain solutions can 5

6 help firms become more strategic, demand-driven organisations that have a focus beyond lower prices (Bursa, 2012). Vertical integration is a way that wholesalers are becoming more competitive in today s dynamic business world, as benefits can be realised with the implementation of this strategy. Though there are risks associated with execution of vertical integration, there is significant evidence to prove its value in the long-term for companies (Stuckey & White, 1993). Actions/Recommendations Wholesalers in today s business environment are constantly facing the challenges of small margins, greater amounts of competition and demanding customers. Balancing too much inventory and too little inventory is also a major test to wholesalers, therefore I believe all wholesalers need to have in place effective processes for accurate forecasting, vendor management, low levels of safety stock and buying inventory only when necessary. Balancing too much inventory and too little inventory will always be difficult for wholesalers to manage, therefore I recommend that wholesalers must place a larger focus on ordering smaller amounts of inventory, more often to keep inventory carrying costs down whilst still satisfying customer demand. Vertical integration provides multiple benefits to firms in many industries, particularly to wholesalers. In my opinion, it is necessary that all wholesalers implement a vertical integration strategy into their own corporate strategy, as it provides a competitive advantage to wholesalers and immense benefits can be realised in the long-term. 6

7 References Bursa, K. L. (2012). Wholesale Distributors are Supply Chains Too. Retrieved from Jurevicius, O. (2013). Vertical Integration. Retrieved from Stuckey, J. & White, D. (1993). When and when not to vertically integrate. Retrieved from egrate The Economist. (2009). Vertical Integration. Retrieved from 7