Question

In your initial post, discuss any service (e.g., Starbucks, McDonalds, Amazon) or manufacturing company (e.g., Boeing, Apple, Dell) that you believe utilizes integrated supply chain management. Compare its operations to a company that you believe uses more traditional supply chain practices.

Answer 1

In traditional supply chain systems, the supplier and front end ecosystem is quite fragmented and unorganized, as compared to integrated supply chain system.

Below are the differences between traditional supply chain system and integrated supply chain systems.

a) Backward integration: in traditional system, the organization works with multiple agents or middlemen, that in turn work with the core producer. Here the middlemen or agent works as an aggregator for the producers and give platform to the company to purchase goods. Whereas the integrated supply chain system like in case of McDonalds, Starbucks etc goes to the producer directly and procures directly. This results in below benefits or costs:

i) More focussed supply chain: In integrated system, the company like McDonalds’ goes to specific set of farmers directly to procure their specific potatoes or meat needed to make the hamburgers. Here, they have long term contracts with them related to price and quantity that helps in providing consistent supply and better price. Whereas in case of traditional supply chain, the cost and supply may vary depending on seasonal fluctuations, any untoward circumstances.

ii) More control over quality of raw materials: In such kind of set up where the quality of raw material significantly impacts the quality of the finished product, hence it is very important to control the quality at the back end. For McDonalds, the quality of meat or potato is of utmost importance as it significantly impacts taste.

iii) Large scale and standardisation: Business like McDonalds, Star bucks,have multiple retail points and they need to ensure standardization at all places. As the scale is large and the raw materials consistency is required, they need to procure raw materials from specific sources only. Whereas in case of traditional systems, as the suppliers could be different from time to time, there is lack of consistency in the raw materials.

iv) Better price control and supply: Because they are buying in huge scale from limited suppliers, they are able to negotiate price better with the suppliers that result in more operational efficiencies. These operational efficiencies result in either the better price for end consumer or more margin for organization or the partners in the value chain. Especially in case of shortage of raw materials, such companies are able to get the supply because of long term contracts in place wheras the small companies who don’t have integrated supply chain systems, either don’t get the supply or get material at high prices.

v) Differentiation: The sourcing strategy also becomes differentiation in some cases as they have exclusivity clause with the suppliers that result in differentiation in market for them. Because they are sourcing from particular farmers and meat suppliers, McDonalds’ has made this a differentiation because if any other small player ventures into this segment, he may not be able to get the best resources in the supply chain.

b) Forward integration

Such companies like McDonalds, or Starbucks are not only integrated backward, they are also integrated on the market side. Whereas traditional supply chain companies have to rely on external distributors and retailers to ensure the reach of their products, these companies set up their own chains in the retail. Below are the differences between integrated supply chain systems and traditional systems based on forward integration:

a) More control over retail: As companies like Starbucks or McDonalds, open their own retail chain or open the outlet through franchisee model, they have complete control over the retail experience and SOP resulting in consistent experience for customers across stores. They have very strong SOP (Standard Operating Procedures) that they follow and replicate across stores. In case of traditional supply chain players, they have to rely on many third party retailers or distributors through whom the customer experience is not consistent and the control is very limited.

b) Less channel costs: As there are no or very less middlemen in integrated supply chain, the cost for the channel is very less as compared to traditional systems. In traditional system, the margin needs to be given to retailer and distributor resulting in higher costs for the channel marketing and this results in more price for the customer. Whereas for companies like Walmart, Starbucks, channel costs are quite less and hence they are able to gain efficiencies. Though such companies have high fixed cost of operations due to stores rentals, maintenance and staff salary etc, they are able to recover such costs with the kind of scale they get by catering to very high volume of customers.

c) Focus on end consumer sales and marketing: This is very important point especially with respect to the issues faced by companies with traditional supply chain systems. Traditional supply chain companies often put heavy stock in the channel to reach their sales targets and this could result in choking the channel. This would result in blockage of money and loss of sentiment for the organization. For integrated supply chain marketing companies, they focus on end customer sales and not on sales to channel, and this results in high channel efficiency, high inventory turnover for the channel and result in more profitability across all stakeholders.

The choice between integrated supply chain system and traditional depends on the scale of the organization and the long term strategy. If the long term strategy is based on differentiation and the scale is big, then the company must work towards building integrated supply chain systems.