Specialization is Supply Chain’s Best Friend

Source: World Trade Organization (WTO)

Trade between nations is front-and-center in today’s political, economic, and business media outlets. Reports and debates continue to examine the impact of free trade agreements and the imposition of tariffs. But sometimes I get tired of the headlines, and I want to obtain a greater depth of understanding about a given topic. For example, I view international trade as a subset of a larger topic, namely trade in general. Whether domestic or international, trade is consistently expanding. It’s not just goods, but services as well. Just think about the outsourcing trends of the last 20 years.  Fortunately for me, I had the opportunity to dig deeply into the interdependencies of the various activities required to run an efficient and effective supply chain. Let’s take a step back and review the organizational fundamentals that shape trade, and supply chain’s role in fitting it all together .

Trade and Specialization Require Coordination

Comparative advantage is the economic logic behind trade. Trade advantages are enabled by economies of scale and capabilities that are derived from specialization at the individual, corporate, and regional level. And I believe that specialization and trade are catalysts behind the growth and increasingly important role of supply chain in today’s global economies.

It is now possible to source items at a lower cost and receive them more quickly than ever before. However, doing so requires superior logistical capabilities and more sophisticated coordination of activities to receive final goods at one’s location of choice. In fact, a large percentage of today’s trade is made up of intermediate goods that cross borders multiple times for value-added processing before reaching the product’s final destination.

As I researched supply chain interdependencies, I came across a wealth of interesting prior research. I learned that the operations management discipline uses the term “perfect coordination” to describe an academic ideal supply chain that is completely centralized, with decisions made exclusively to maximize goals of the entire supply chain. Of course, it is only a concept, as there are numerous inefficiencies within a supply chain that require constant management to deliver desirable outcomes. The inefficiencies are derived from a lack of information, a lack of understanding about an individual or an organization’s role in the larger supply chain, and misaligned incentives – essentially optimizing locally instead of holistically. The bullwhip effect is the example familiar to most of us. But it is just one of many systemic supply chain inefficiencies.

Coordination Requires Communication and Alignment

I found an article in the Journal of Business Logistics to be especially useful for framing the issue (see Supply Chain Management Coordination Mechanisms). The researchers find that there is a disconnect between academic research on coordination mechanisms and what practitioners consider useful and applicable. They break the mechanisms into three categories – price (discounts), non-price (exclusively arrangements, etc.), and flow coordination mechanisms (VMI, CPFR). These researchers found that practitioners overwhelmingly prefer flow coordination mechanisms over the alternative mechanisms. Furthermore, multi-functional involvement and a focus on complexity were essential dimensions to successful implementation. Finally, capital, volume, and technology were viewed as critical enablers. This research was published in 2006, when software and computer processing capabilities were not nearly as robust as they are today. It would be interesting to learn how views have evolved since then. I can only assume that the innovative firms have expanded and refined their processes exponentially since then.

For those of you that would like to supplement your summer reading with some classic academic work on the topic, I recommend the following articles:

  • Supply Chain Management Coordination Mechanisms (“Journal of Business Logistics”, 2006)
  • Decentralized Supply Chains with Competing Retailers Under Demand Uncertainty (“Management Science,” January 2005)
  • The Bullwhip Effect in Supply Chains (“MITSloan Management Review”, 1997)

Leave a Reply

Your email address will not be published. Required fields are marked *