SUPPLY  CHAINS

Each company in a supply chain must make some profit – but not equal profits:
  • component manufacturer
  • assembler
  • export distributor
  • import or domestic distributor
  • retailer
  • consumer

Key determinants of profit rate of each supplier:
  • Pricing power:
    • How many competitors does the supplier have? (The more competitors, the less pricing power.)
    • How many potential buyers does the supplier have? (The more buyers, the more potential for pricing power.)
  • Costs: How does the supplier’s cost structure compare to its competitors?

What influences the number of competitors?
  • Uniqueness of the product or component – how innovative is the product or component?
  • Note that an innovative end product may have some very standardized components (I-Pod).
  • Perceived uniqueness due to trade name or image: this is especially important at the retail level, but some trademarked companies from whom retailers purchase have their own reputations and potential for markup.

What influences the number of buyers?
  • Market structure in the markets of the buyers (e.g., Wal-Mart reigns supreme).
  • Ability of the supplier to access alternative buyers.
  • Small suppliers have difficulty identifying and contracting with far-flung buyers (e.g., small-scale farmers).
  • Suppliers in obscure or non-market-oriented locations (e.g., Thailand) have difficulty identifying and contracting with far-flung buyers.
  • Both can be captives of middlemen or of global companies.  

What influences the supplier’s costs?
  • Labor costs (e.g., China)
  • Production and inventory-control systems: generally require up-front investment and sufficient scale to justify them.

Resultant retailer strategies:
  1. Grow large through expansion or acquisition, and dominate the supply chain through buying power and through eliminating middlemen (with their attendant profit) – but do not manufacture; maintain flexibility and encourage competition among suppliers.
  2. Price aggressively, foregoing some current profit to reduce the potential for new competitors (who would likely have higher costs).
  3. Maintain uniqueness through tradename, advertising, unique product mix or level of service, to reduce direct competitors – while seeking variety in suppliers, not being overly dependent on any one. (E.g., make sure to carry and promote several fashion designers, old and new).
  4. Develop “own-label” products to compete with products that have tradenames and thus market power. Source these own-label products from a variety of competing suppliers, to eliminate dependence on any one.
  5. Maintain uniqueness through loyalty: “the neighborhood store,” “the African American mens’ boutique”

Resultant geographic implications of these strategies:

1 & 2. The large-scale and low-cost strategies imply national and international expansion of retailers, global sourcing, and integrated supply management by owned companies – but not owning the ultimate suppliers.
3. The trade-name strategy has similar implications: large scale of sales is necessary to support the expense of developing and maintaining a strong brand.
5. The unique, niche strategy allows profitability with small scale: unique shops in either neighborhood locations (manifesting a desire for n’hood loyalty) or in clusters with larger shops (to draw in curious customers).

The more common, in-between strategy – small or medium scale, without uniqueness – results in minimal profit. Most start-up retailers and most moderate-priced restaurants operate in this position, and have a very high failure rate. Note how chains are making inroads in the moderate-priced restaurant business, and how convenience stores are generally chained.
copyright James W. Harrington, Jr.
revised 1 April 2010