Which Factors Influence Decisions to Integrate Supply Chains?

1.0 Introduction

Supply chain management can improve financial performance; lead to satisfied customers; reduce delivery times; and build trust, confidence and commitment among suppliers. However, integrating supply chains to achieve expected benefits is a key strategic challenge since managers operate in a complex, turbulent and highly competitive environment in which quick response to customer needs and flexibility are vital for firm survival and success. Factors that influence decision to integrate supply chains and achieve expected benefits include: management attitude to risk; firm size, resources and targeted market; the firm’s geographical location; the firm’s customers, suppliers and competitors; and the firm’s structure. These factors are discussed in this article.

Section 2.0 discusses the factors that influence the decision to integrate supply chains; section 3.0 gives conclusion from the discussion. Then references are provided.

2.0 Factors Which Influence Decisions to Integrate Supply Chains

2.1 Holistic and Integrated Approach to Supply Chain Management

A firm’s supply chain consists of a range of diverse participants whose interests at times conflict. Such participants may include: suppliers of inputs (materials, information and knowledge, etc.); the firm itself; distributors and other agents; retailers; final consumer/user; and competitors. Making a holistic analysis and consideration of the interaction among such diverse and dispersed participants is both strategically vital and complex. It implies that a firm needs to establish relationships and partnerships with all the participants: managers manage not only their firms but also relationships among the supply chain participants. Therefore, a firm’s traditional boundaries and country borders seem to be just imaginary since firms and countries are interdependent thus forming a complex system.

Supply chain management (SCM) can be described as a process of receiving inputs (materials, information and knowledge, etc.) from suppliers and transforming the inputs into goods (products/services) which are then supplied to final consumer/user. Therefore, SCM must facilitate interaction and communication within a supply chain/system thus enabling almost frictionless flow of materials, information and knowledge within the system. This implies that managers must plan, coordinate, monitor and control processes, activities and decisions within and without their firms to increase firm performance. Therefore, integration of supply chains involves establishing and facilitating linkages and cooperation among participants to enable an almost frictionless flow of materials, information and knowledge within the supply chain. Such integration aims at cost reduction, improving quality and flexibility within the supply chain while creating value to achieve customer satisfaction, sustainable competitive advantage and overall performance of participating firms. Integration can be achieved when the participants cooperate and share information and knowledge, for example, on designing products/service offering and innovating new processes.

Supply chain integration activities/processes can be carried out internally (intrafirm—among the firm’s functional units) or externally (interfirm—among participating firms i.e. suppliers and customers). According to the Global Supply Chain Forum, the key processes involved in integrated supply chains form the core of SCM and they include: customer relationship management; customer service management; demand management; order fulfilment; manufacturing flow management; procurement; product development and commercialization; and consideration of returns. Categories of supply chain integration are provided by Hadas et al. (2015, p.230).

The decision to integrate supply chains is influenced by several factors some of which are discussed in the next subsection.

2.2 A Firm’s Features that Influence Decision to Integrate Supply Chains

For integration of supply chains to occur, there must be a firm that is willing and capable of acting as a change leader for the participating firms—integration does not occur without leadership. This implies that a firm has features that influence decision to integrate supply chains. These are discussed next.

2.2.1 A Firm’s Management’s Attitude towards Risk

Integrating supply chains among diverse and dispersed participants/partners involves risk and uncertainty since the participants lose some level management control. For example, deciding to obtain raw materials from distant suppliers who may be in other countries makes the firm dependent on the efficiency and effectiveness of those suppliers. Such supplier performance can unpredictably be affected by regulations, transport systems, political and economic factors, etc. This involves some level of uncertainty and risk. This implies that the more risk-averse management is, the less likely that the firm will have fully integrated supply chain. Managers may decide to retain full control of their supply chain thus deciding not to integrate their supply chain with supply chains of other firms. Managers will thus decide to plan, organise, monitor and control their supply chain in “isolation”. Whether such an approach is less risky and sustainable is a matter of debate. Arguably, the opposite is most likely.

2.2.2 A Firm’s Size, Resources and the Targeted Market

Integration of supply chains requires a firm’s ability to exchange information and knowledge with participants. For example, there is a need to share information about physical location of materials during transportation from initial supplier to the final user/consumer. This requires resources such as technology, financial and human resources. The costs involved and resources needed may hinder a small firm from participating in a costly and complex supply chain system. The firm may decide to remain working as an isolated entity until it acquires a threshold level of resources. Small firms tend to have fewer resources available to deploy in costly cooperation initiatives. Similarly, if a firm operates in or targets a small market which is not complex, it may decide not to integrate its supply chain. However, a complex market characterised by a fast changing environment, short product life cycles and highly demanding customers will necessitate the firm to cooperate and coordinate with other firms to create value and satisfy customer needs. Such coordination and communication is facilitated by telecommunication and computer technology which small firms may not possess. Such technology may include internet, intranet and extranet to improve effectiveness and competitiveness of supply chains.

2.2.3 A Firm’s Geographical Location

True, we are living in a world which is like a global village in which a customer can have access to services and products from suppliers who live several miles away. Time and distance seems not to be a barrier between suppliers and customers. However, some firms still have geographical barriers to supply chain choices and decisions. For example, a firm located in Russia may not integrate its supply chain with supply chains of firms in the US due to political and economic restrictions on Russia. The same applies to firms located in China since there is still a trade war between China and the US. Huawei has the most recent experience of how geographical location can influence decision to integrate supply chains. This is because several former supply chain partners had to break ties with Huawei on direct and indirect command of the US government. This shows that geographical location matters: the world is not yet a perfect global village. This can be clearly understood by firms located in countries like Syria and Iran where political and economic tensions exist between the countries and some global powers thus causing high levels of risk and uncertainty in making supply chain decisions. Firms may not know whether supplies will be allowed to flow tomorrow or the next hour!

2.2.4 A Firm’s Customers, Suppliers and Competitors

The business environment has become intensely competitive. This is partly due to regional trade agreements that have reduced tariff barriers. Similarly, customers have become very informed and demanding due to almost costless access to (dis)information on social media and search engines. For example, customers demand timely and flawless delivery of high quality customised products at low cost. This is a complex demand to meet, and therefore, facilitates intense competition which has made firms to look for ways of increasing efficiency and effectiveness of their operations as product life-cycles shorten greatly. This implies that a firm’s decision on whether to integrate supply chains will depend on intensity of competition and nature of its customers. It can decide to integrate its supply chain with those of its competitors if the firms see themselves as potential co-operators not adversaries with a hostile relationship/interaction. Similarly, such integration can be possible if the firm trusts suppliers and assesses them as committed, and thus fully dependable with minimum/acceptable level of risk. The supply chain must be able to add value through cost reduction and reducing delivery times of high quality products. This necessitates innovation at a high rate, flexibility and timely response to customer demands/needs.

2.2.5 A Firm’s Structure

Integrating supply chains requires making strategic, tactical, and operational decisions. This implies that to establish an integrated supply chain, a firm’s functional units (finance, marketing, operations, logistics, etc.) must cooperate and be appropriately coordinated. This will bring about internal integration which can then be followed by external integration in which the functional units will be closely linked to and interacting with those of other firms. This implies that a firm’s structure needs to be able to handle an appropriate level of inventory and facilitate provision of the required level of quality of service/products. For example, a hierarchically and bureaucratically structured firm in which decision making has to follow a traditional authoritative route may not be a good participant in a supply chain that requires just-in-time operations. This is because in case of a problem, the firm’s structure will not enable quick response to solve the problem. This can bring ineffectiveness in the integrated supply chain. Therefore, a firm will not decide to integrate its supply chain with others if its structure is not suitable for the integration requirements.

3.0 Conclusion

Supply chain management can improve financial performance; lead to satisfied customers; reduce delivery times; and build trust, confidence and commitment among suppliers. However, integrating supply chains to achieve expected benefits is a key strategic challenge since managers operate in a complex, turbulent and highly competitive environment in which quick response to customer needs and flexibility are vital for firm survival and success. Therefore, even if every firm would like to integrate its supply chain with others, the decision to integrate supply chain and achieve the resulting benefits is influenced several factors. These factors include: management attitude to risk; the firm’s size, resources and targeted market; the firm’s geographical location; the firm’s customers, suppliers and competitors; and the firm’s structure.

The above mentioned article is a concise version of the full academic article that is available exclusively to the iQualify UK students in our Teaching Zone.

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