Consumers worldwide receive orders at their doorsteps without thinking about how the goods move from raw material to manufacturer and into their hands. The simplicity and predictability are a testament to the proven chains companies have painstakingly built over the years. Every company spends a lot of resources, such as time, money, and human resources, on producing and delivering suitable goods at the right time. The sheer volume of planning, cases, and collaboration entails within the realm of supply chain management. It is a practice that includes leadership, research and development, operations, financing, marketing, sales, and logistics. The well-planned supply chain management is essential to customer satisfaction and, ultimately, the success of any business. The research question can be formulated as follows: is the supply chain effective for creating a competitive advantage and ensuring the profitability of the company?
Defining Supply Chain
The supply chain is a system of processes that determines the formation of information, material, and financial flows from suppliers to end consumers. It consists of many links which can be presented as chain objects. Today’s flexible and efficient supply chain is one of a company’s most critical competitive advantages in any industry and market. Supply chains are closely connected with companies’ production, marketing, sales, finance, and other departments. Today, activities aimed at managing supply chains have become as important in promoting products as marketing. Attracting a buyer with a well-built marketing campaign is vital to increase the market share of a product without effectively building supply chain processes. Researchers believe that the efficient chain can be achieved through supply chain management (SCM) which is a systematic approach to organizing the processes (Kaur et al., 2019). It is centered on reducing risks and achieving measurable economic effects such as decreasing operating costs and improving the level of service.
Supply chain management refers to all activities required to turn raw materials into finished goods or services and the work needed to distribute and deliver those goods or services to partners and customers. SCM applies to the planning phase and the transfer and management of information and capital throughout the supply chain. This discipline has five main components: planning, sourcing, manufacturing, shipping, and returns (Smith et al., 2019). The idea behind supply chain management is that supply chains can add value to a business and even give it a competitive edge. This contrasts with the historical view of this network as a cost center. In essence, the supply chain network covers all stages of turning subcomponents and materials into a finished product that customers want. Supply chain management is about managing and finding ways to improve this network.
Different Functions of Supply Chain Management
The customer service quality department is the first function of supply chain management. It refers to procuring raw materials and other resources needed to produce goods. This requires coordination with suppliers to deliver materials without delay and the alignment of all processes in the chain for a successful operation. The second vital function is purchasing, which ensures the timely delivery of the raw materials required to produce the particular goods. The third function is related to the operations team that is responsible for planning and forecasting demand. Before placing an order for the supply of raw materials, the organization must anticipate the possible market demand and the number of units to be produced. Accordingly, it also establishes the ball’s movement for inventory management, production, and delivery. If demand is expected, this can lead to excess inventory costs (Nakano, 2020). If demand is expected, the organization will not be able to meet customer demand, resulting in a loss of revenue (Nakano, 2020). Thus, the operational function plays a critical role in supply chain management.
The logistics supply chain management function requires tremendous coordination. Production of products needs storage space until it is shipped for delivery. This involves the creation of local warehouse agreements. Let’s say the products must be shipped outside a city, state, or country. This leads to carriage in a loop. There will also be a need for storage facilities at the terminal. Logistics ensures that the products reach the final delivery without any disruption (Smith et al., 2019). Another function is resource management which establishes the correlation between raw materials and labor. Any production consumes raw materials, technologies, time, and work. However, all processes must be efficient and effective. The resource management team takes over this phase. It decides the allocation of resources in the suitable activity at the right time to optimize production at reduced costs. Information sharing and dissemination are what really power all other supply chain management functions. If the information workflow and communication are wrong, it can break the whole chain and lead to mismanagement.
Problems with Supply Chains That Are Ineffectively Managed
Manufacturers and retailers are now constantly concerned with improving the efficiency and flexibility of their increasingly weak supply chains. On the one hand, manufacturing and retailers continuously have to calculate demand, analyze bottlenecks, monitor every link in their supply chain, and apply a proactive planning approach. On the other hand, they need to monitor costs strictly. One area that needs more attention is inventory. While minimum inventory reduces costs, just-in-time operations leave no room for error. Any minor break in the supply chain can significantly impact the business and be disastrous for a well-established production line. Urgent shipments to restore a disrupted supply chain are costly, making the entire previous procedure a fruitless attempt to save money. Another challenge for supply chain managers is the transportation industry, which has been having a hard time lately.
A considerable number of outsourced services entails a situation in which the volume of trade operations is ahead of the capabilities of freight carriers. The study found that the biggest problem in the supply chain is the limited capacity of freight carriers (Yalcin et al., 2020). The capacity crisis has resulted in many shippers becoming less concerned about rising fares and more focused on how the shipping company, port, and rail services are able to keep the just-in-time supply chain operating. The problem related to accidental spoilage and damaged goods comes immediately after the first problem. Given the vigilant monitoring of profit levels, one cannot fail to notice that the increase in freight prices is a critical issue.
Global Supply Chain Vs. Domestic Supply Chain
Local supply chains are formed and operate on the scale of one territorial unit of the state – the region. Such chains are mainly direct supply chains and are considered easier to manage. Global supply chains are created when, in the process of functioning, the supply chain goes beyond its region and interacts with suppliers from other areas (Longoni & Koberg, 2019). The supply chains can be a competitive advantage for the company on both levels: global and domestic. Despite the fact that the general implementation of the worldwide supply chain is more complicated than focusing on the household, it can minimize production costs. Such an approach allows us to find a more beneficial supplier from different parts of the world. The prices of transportation will be higher. The costs should be calculated at the stage of the supply chain planning. The global chain provides the company with more extended selling opportunities resulting in higher revenues (Longoni & Koberg, 2019). Thus, it can be considered a competitive advantage over the domestic supply chains, which are limited in resources, raw materials, and suppliers choosing only from one particular region’s opportunities. On the contrary, the domestic supply chain ensures more stable production. It has lower costs and is deprived of significant risks. Each company should analyze the strengths and weaknesses of output to choose the type of supply management that can be made a competitive advantage.
Supply Chain During COVID-19
Supply chain constraints caused by the coronavirus pandemic have created ideal conditions for a revolution in supply chains. Demand fluctuations, unpredictable consumer behavior, and trade disruption have exposed companies’ weaknesses. Simultaneously, the pandemic has opened up a unique opportunity for leaders to make smarter and bold decisions about their organizations’ supply chains (Craighead et al., 2020). Companies worldwide that have opened up to innovation, change, and development have discovered both the short-term competitive advantage and the long-term value of more efficient supply chains.
With the closure of a large number of factories around the world, the logistics ecosystem has also suffered. As governments worldwide have imposed a ban, forcing people to stay at home, brick-and-mortar stores are facing a significant challenge. The first challenge in the supply chain is mining. The coronavirus has hit global raw material supplies hard. As manufacturing units worldwide are close to containing the virus, the disruption is affecting all industries.
The government’s bold move to contain the spread of the virus has hurt sales. When people stay at home, sales plummet. Travel restrictions lead to a sharp decline in bookings for hotels, restaurants, and other service industries that depend on tourism. Meanwhile, disinfectants, masks, and other medical supplies are suddenly rising, leading to panic buying and being out of stock. Demand will remain volatile throughout this crisis. Another problem is related to the collection of critical values (Craighead et al., 2020). The primary step in optimizing and building a stable supply chain system is to map the current supply chain. A complete holistic approach can take into account the wages of workers and even the time spent on their duties (Golpira et al., 2021). Business management software can integrate multiple cost centers into enterprise software to measure and understand the structure and costs in the supply chain.
A deep dive into the supply chain ecosystem can help in the areas of cost optimization and automation of every step with practical business management software. Cost savings help you maintain relationships with suppliers, optimize your storage strategy, and integrate business intelligence to analyze customer patterns and supply flows. Speeding up processes and delivery with efficient enterprise software will shorten the time to revenue and save a lot of time through technology optimization. The global COVID-19 pandemic has caused widespread panic that has disrupted the supply chain ecosystem and negatively impacted retailers. E-commerce and CRM are important in confronting this crisis and allowing them to maneuver in the highly competitive sales market.
Profitability/Competitive Advantage of Supply Chain
The key to a company’s success in the market is to obtain a sustainable competitive advantage based on a unique combination of internal resources and management strategies. Judging by the literature studied the main principle of achieving a competitive advantage in the market by supply chains by reducing costs in different functional areas of logistics throughout the chain and through range differentiation. Another inquiry required to make the supply chain profitable is the implementation of the managemental strategy helping to adjust all the processes for efficiency. Effective supply chain management dramatically affects the competitiveness of the company and allows you to reduce costs in the supply chain, thereby reducing the cost of goods (Azam et al., 2019). Companies gain a substantial competitive advantage by improving strategic supply chain management processes and turning them into powerful assets. Marketing and supply chain management policies are strongly influenced by the economic situation in the country and the world. The economy is characterized by cyclical development, alternating periods of crises, and upswings. Supply chains are pretty sensitive to crisis and recession impacts. As a rule, a significant drop in sales and profits is a consequence of the country’s economic instability. Initiatives to improve logistics processes are becoming the key to solving acute financial problems.
The analysis of the main factors ensuring the efficiency of the supply chain will be conducted based on the experience of Zara. A well-developed supply chain management strategy helps the company to survive crises and unstable market situations. Even during COVID-19, despite the significant losses, Zara’s administration managed to change the specificity of the supply chain, providing online deliveries through the website (Inditex, 2021). Zara competes for the flexibility and speed of its supply chains instead of low cost and cheap labor. They employ about 3,000 workers in manufacturing plants in Spain at an average cost of €8.00 per hour compared to an average Asian labor cost of around €0.40 per hour (Inditex, 2019). Zara factories in Spain use flexible manufacturing systems to change production operations quickly. The distribution is presented in the following proportion: 50% of all products are made in Spain, 26% in the rest of Europe, and 24% in Asia and Africa (Inditex, 2019). Production is concentrated in northwestern Spain, where the company’s headquarters and Cube are located. But for their main distribution and logistics center, they chose a more centralized facility.
This enterprise is situated in Zaragoza in a large logistics center. Suppliers send raw materials to the Zara manufacturing center. The finished garments then leave the Cube and are delivered to the Zara logistics center in Zaragoza. From there, it is delivered to stores worldwide by truck and by plane. Zara can deliver clothes to stores worldwide in just a few days: to China in 48 hours, to Europe in 24 hours, to Japan in 72 hours, and to the USA within 48 hours (Inditex, 2021). The company uses trucks to deliver to stores in Europe and uses air freight to provide clothing to other markets. Zara can afford this increased shipping cost because it doesn’t have to do a lot of discounts on clothes and doesn’t spend much money on advertising either.
Stores take deliveries twice a week and can often receive ordered items within two days of placing their orders. Goods are delivered to stores already on hangers with tags and prices (Aftab et al., 2018). Thus, goods are torn off trucks and delivered directly to the marketplace. This allows store managers to order and receive the items customers want, when they want, week after week.
Zara stores are reacting in near real-time to changing consumer styles and preferences. This is a great business model for success in the volatile and unpredictable fashion industry. This means that about half of the clothes the company sells, most of its high-margin and unique fashion items (but not the lower-margin essential items), are made based on highly accurate short-term demand forecasts (Iditex, 2019). Because this business model matches actual consumer demand very closely, it frees the company from cyclical ups and downs in the market.
Zara strives for the achievement of the accurate segmentation of suppliers and customers, greater accuracy of forecasting, and alignment of logistics, production, and purchases to demand forecasts by attaching all supply chains. Based on the company’s experience, the main factors affecting supply chain management efficiency can be highlighted (Qin, 2019). The first one is the strategic optimization of logistics, including continuous optimization of the complex supply chain from suppliers to end users. The second is optimal inventory management aimed at increasing the turnover of goods, including technologies for joint replenishment planning with suppliers. The third factor ensuring a solid supply chain is a focus on the fast turnover, forced to work directly along the entire length of the supply chain from supplier to consumer.
Four significant directions of supply chain management were estimated based on Zara logistics: chain speed, reliability, flexibility, and costs.
Chain speed. This parameter defines the length of the cycle from the purchase of raw materials and materials by the supplier of the goods to the receipt of the actual finished goods by the consumer. Chain speed is sometimes referred to as supply chain length and is measured in days. Chain’s speed is one of the significant factors which Zara strives to achieve. The high speed of the product’s rotation and delivery is one of Zara’s significant competitive advantages.
Reliability of the chain. The degree of compliance with the established delivery dates. The company focuses on completing client orders as far as possible. The managemental structure is customer-oriented. It also allows them to establish a significant competitive advantage.
The flexibility of the chain. This parameter includes the ability to timely adapt the supply chain in accordance with the consumer’s changing needs. For example, it can involve changing the share of sales of a particular product in the portfolio depending on demand or introducing new product modifications to the market. Zara shows good indicators of flexibility, such as the frequency of out-of-stocks in the retail part of the chain.
Chain costs. The total cost of the supply chain operation consists of production, procurement, transportation, warehousing, insurance, write-offs of obsolete and spoiled stocks, chain financing, and many others. Considering the fact that Zara has a global supply chain, the costs are obviously high. There is no data related to reducing production costs. However, the general revenue due to efficient supply chain management is supposed to cover the increased expenditures.
Conclusion and Recommendations
Concluding the analysis, it can be mentioned that the company is centered on developing the chain’s speed and flexibility factors. Zara centers on addressing two out of four major elements of successful supply chain management. Despite this, these actions are enough to make the supply chain a competitive advantage for the company. Therefore, one of the major factors ensuring successful supply chain management is the chain’s flexibility. The analyzed company successfully uses the resources and processes of the supply chain as a competitive advantage ensuring efficient customer-centered delivery.
The literature review and the analysis of Zara’s experience allow us to conclude that using the supply chain as a competitive advantage is possible. Moreover, the supply chain is one of the significant parts of the business, which, under the efficient magnet, can reduce costs, cover expenses, and build customer-oriented services. Recommendations for companies that strive to use the supply chain as a competitive advantage include considering a balanced managemental strategy. The primary focus should be on the flexibility of the chain, which can adjust to the constantly changing market conditions. Therefore, the research question was answered based on the literature exploration and the analysis of Zara’s experience.
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