Value-Added Functions and Differentiation of Supply Chains

Value Added Functions and Differentiation of Supply Chains

The purpose of supply chains is to add value to production and distribution. Depending upon the markets and the value chains they are servicing, supply chains can be differentiated according to criteria such as costs, time reliability, and risk. Efficient logistics contributes to added-value in four major interrelated ways:

  • Production costs. Derived from the improved efficiency of manufacturing with appropriate shipment size, packaging, and inventory levels. Thus, logistics contributes to the reduction of production costs by streamlining the supply chain.
  • Location. Logistics adds value by taking better advantage of various locations, implying access to expanded markets (more customers), and lower distribution costs.
  • Time. Added value derived from having goods and services available when required along the supply chain (e.g. lower lead times) with better inventory and transportation management.
  • Control. Added value derived from controlling most, if not all, the stages along the supply chain, from production to distribution. By better synchronizing cycles and lead times, logistics enables better marketing and demand response, thus anticipating flows and allocating distribution resources accordingly.

A variety of factors are jointly shaping the configuration of supply chains:

  • Logistics costs. Considers the full array of costs to make products available to the final consumer, namely transport, warehousing, and transshipment. Supply chain managers are particularly sensitive to the stability of the cost structure (consistent costs), implying that routes having cost fluctuations may be discarded in favor of routes of a higher cost but with less volatility. Therefore, costs are a standard criteria where the cheapest routing option is sought, as long as the cost structure remains stable as supply chains are unlikely to be modified if a cost advantage is only temporary. The concept of cost is relative since its importance concerns the value of the cargo being carried. Cost considerations tend to concern more containerized goods with a low value, such as commodities (e.g. paper), than high-value goods (e.g. electronics).
  • Transit time. A factor that is increasingly being considered since it strongly influences inventory carrying costs and inventory cycle time in supply chain management. So, for cargo with a higher value (clothing) or is perishable (refers), the routing option that is the fastest and/or shortest will be preferred.
  • Reliability. Relates to a factor that is mitigated by contemporary supply chain management practices. For several supply chains, time can be a secondary factor as long as shipments arrive at the distribution center within an expected time frame. If shipments are regular and this reliability remains consistent, it is possible to organize supply chains accordingly by having more inventory in transit.
  • Supply chain risk. Relates to a generally imponderable factor and involves the level of confidence that the shipment will reach its final destination within expected costs, time, and reliability considerations. In some cases, risk can also involve potential cargo damage or theft. Low risks routes are obviously preferred over higher-risk routes.