ECONOMIC AND TECHNOLOGICAL ASPECTS OF SUPPLY CHAINS AND ITS MANAGEMENT IMPLICATIONS

Supply chains are normally defined as the set of companies that transact products, information and financial resources with each other over time. Despite theoretically starting at the initial supplier (closest to land) and ending at retail (closest to the final consumer), supply chain management is limited, in the vast majority of cases, to the supplier-customer link, and to a lesser extent sometimes to the tier 2 supplier-tier 1 supplier-customer link.

This limitation would be a consequence of the enormous complexity involved in aligning the interests and priorities of each company in the chain. Four economic and technological aspects would characterize the different companies in a supply chain. These economic and technological aspects would influence, in most cases, the definition of each company's priority agenda. To know:

• The structure of fixed and variable costs of the operations that make up each company.
• The response time of the operations that make up each company.
• The added costs accumulated at the end of the company.
• The contribution margin obtained by each company in the chain when negotiating with the next company.

2. STRUCTURE OF OPERATIONS' COSTS AND RESPONSE TIME

Companies positioned closer to the land would have operations characterized by a higher proportion of fixed costs compared to variable costs. Its production and distribution operations are predominantly continuous flow and notably capital intensive. On the other hand, companies positioned closer to the final consumer tend to have operations characterized by a higher proportion of variable costs compared to fixed costs. Its production and distribution processes are predominantly discrete flow and less capital intensive.

Often the cost structure of operations reflects their degree of flexibility with respect to speed, volume and variety. For example, operations with a higher proportion of fixed costs are less flexible, presenting longer response times and technological limitations to variations in volume and variety. This is the case of steel mills, refineries and distilleries, as well as extractive and agribusiness companies. Operations with a higher proportion of variable costs are more flexible, with shorter response times and lower technological limitations to variations in volume and variety. How about comparing a brewer's bottling and packaging operations to your production operation? Or going further, what is the average response time for replenishing stocks on the shelves of a large retailer?

A higher proportion of fixed costs would be associated with policies that prioritize larger production, purchasing and distribution lot sizes, since response times are long and volume and variety flexibility is small. Operating with larger batch sizes is also a frequently used means of diluting fixed costs by a larger apportionment base. Fortunately, these situations tend to focus on low-cost added products.

3. ADDED COSTS

The added costs accumulated at the end of each company, when analyzed from the land to the final consumer, would systematically grow in the form of a “step”. The added costs indicate that the opportunity costs associated with holding inventories tend to be higher in companies positioned close to the final consumer, and lower in companies positioned close to land. Higher opportunity costs of holding inventories normally imply a greater need for working capital on the part of companies. This need could be met by reducing customer receipt times and extending payment terms to suppliers, or with other measures that imply a reduction in the cash cycle.

Lower added costs and a higher proportion of fixed costs would lead to the need to continually generate economies of scale in production and distribution operations. If there is no dilution of fixed costs by a larger base of products, how can they be passed on to products with low added cost, and consequently, low selling price? On the other hand, higher added costs (consequently higher prices) and a higher proportion of variable costs are stimuli for the redesign of operations in the continuous search for speed and flexibility in terms of volume and variety. If the opportunity cost of maintaining inventories is high, is it possible to reduce these costs through more agile operations?

4. CONTRIBUTION MARGINS

Contrary to the other aspects, it is not possible to state that contribution margins systematically increase or decrease as a given company is positioned closer to the land or to the final consumer. For example, it is common sense that retail margins are very low, as well as in some segments of agribusiness (orange growers, milk suppliers, etc.). The factors that allow higher or lower contribution margins have already been exhaustively studied. The main ones are related to the intensity of competition, the bargaining power of customers and suppliers and the degree of product differentiation. Higher contribution margins lead companies to less parsimony in inventory management. After all, how much would you lose if there were no stocks of the product?

Figure 1 below summarizes the main economic and technological aspects discussed in the four previous sections. As indicated by the red arrows, flexibility of response, variable costs and degree of customization tend to increase from land/suppliers to retailers/consumers. On the other hand, they tend to decrease fixed costs, response times and lot sizes.

5. MANAGEMENT IMPLICATIONS

Understanding how these four aspects are related can allow a company to define, with greater clarity, its agenda of priorities for managing supply chains. Several management initiatives emerge year after year in this direction: CRP (Continuous Replenishment Program), ECR (Efficient Consumer Response), VMI (Vendor Managed Inventory), CPFR (Collaborative, Planning, Forecasting and Replenishment), consignment, B2C (Business-to- Consumer), postponement, etc. How to identify which initiative is most adherent to the economic and technological aspects of a given segment or link in the supply chain? In which segment or link in the chain is it most common to implement a certain management initiative?

The answer to this question is not trivial. Perhaps a few more years of observation of business cases are needed to be able to perfectly relate all these management initiatives to different levels of economic and technological aspects of supply chains. However, it is already possible to enumerate some relationships between these aspects and management initiatives. For example:

• ECR and CRP tend to focus on the link between nondurable consumer goods manufacturers and retailers. The key to the successful implementation of these programs is greater flexibility with regard to delivery speed, volume and variety on the part of manufacturers. Its main motivation is the reduction in the opportunity cost of holding inventories, a benefit that tends to be increasingly concentrated in retail due to its growing bargaining power. The CPFR must be understood in this context, by incorporating the preparation of sales forecasts together.
• The VMI tends to be verified when the bargaining power of suppliers is greater than that of their customers. The idea is that by managing stocks in the chain, suppliers will be able to better plan their operations, motivated by the high opportunity costs of holding stocks or by production and distribution operations that are intensive in fixed costs. The key to VMI is controlling the flow of products through the chain as a means of achieving the supplier's planning objectives: minimizing the costs of being flexible for high-added cost products or controlling the unit costs of producing and distributing high-end products. low added cost.
• Consignment can occur at VMI, allowing the objectives described in the previous item to be achieved or in cases where the customer's bargaining power is much greater than that of the supplier. In this case, the chances of conflict in the customer-supplier relationship tend to be minimized when the customer indicates a greater predictability of consumption of the consigned product, when the opportunity costs of maintaining inventories are known and when there are well-defined service level expectations. .
• B2C is related to opening direct distribution channels between manufacturers and final consumers. To date, this decision has proved to be economically inefficient for products with low added cost and for operations with long response times. The minimum economically viable scale to produce and distribute under these circumstances has to be high.
• Postponement is an initiative most adopted by manufacturers of modular products that market them to groups of customers with different expectations regarding delivery times, models and lot sizes. The product design, as it is modular, and the demand, as it is heterogeneous, allow economies of scale and scope to be explored simultaneously in production. Economies of scale are associated with producing a large number of modules. Economies of scope come from producing a wide variety of combinations of these modules. Long lead times and short turnaround times also play a key role in delay.

6. CONCLUSIONS

This article explored the main economic and technological aspects that can characterize a company in the supply chain. These aspects can, under certain circumstances, determine the company's priority agenda and direct the adoption of specific management initiatives such as ECR, CRP, VMI, consignment and postponement.

BIBLIOGRAPHY

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