Relying on Market to Manage Supply Chain

In Supply Chain Management, many companies have this kind of misunderstanding: Market is a perfect guidance and market competition should be used to do supply chain management. But is this correct? Personally I don’t think so.

There is a saying that more incoming suppliers will make the competition more competitive and thus decrease the supply chain cost (Christopher 2013). But I think this is actually a lame statement. There are several reasons why this logic is incorrect .First of all, the price may not effectively and directly affected by the supply-demand relationship as we think (Blanchard, 2013). Just as the controversial effective market theory in finance, the stock market in reality cannot be one hundred percent transparent. Similarly, the supply chain cost cannot reflect the changes in supply-demand relationship effectively and fast. Second, if the company is a relatively small company, then even it imports more suppliers, the supply chain cost may not decrease accordingly if you do not have strong arguing power on the price issue. Third, it is possible that as a supplier, even there are more competitors in the same business area, it is still not able to decrease its service price .So according this three reasons, it may not be a wise method to try to decrease the supply chain cost by increasing the number of suppliers.

Some suppliers tend to make the price excessively low to gain more attention from potential customers or build collaboration relationship with some big corporations. This situation may lead those customers to have the thoughts that it may be a useful method to decrease the supply chain cost by building multi-edge relationships with more and more suppliers. But this situation may make things worse. To maintain the good relationships with those new suppliers, the company must provide some extra benefits, maybe some more orders, which make the market portion of original supplier shrinks. So the company will have be less powerful to argue the price with those original suppliers (Munsun, 2013). But if the company just use the new suppliers to suppress or give pressure to the existing suppliers, then as long as the new supplier realize this situation, there will definitely be some potential problems in these kinds of collaboration relationship. In long term vision, trying to decrease the supply chain cost by using more suppliers may be harmful and cause serious problems between suppliers and its customers.

References:

Blanchard, D., 2007, Supply Chain Management Best Practices

Christotpher, M., 2013, Logistics and Supply Chain Management

Munsun, C., 2013, The Supply Chain Management Casebook

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