The success of an organization is anchored on how such an organization manages its supply chain. The oversight of finances, materials and information on supply chain management is becoming costly to organizations by day. For effective supply chain management, organizations have turned to cost leadership and differentiation to a long-term operational relevance (Ireland, Hoskisson, & Hitt, 2012). Central to the cost management avenues explored today by organizations is cost differentiation and cost leadership management. This paper, based on a range of reputable sources, explores the application of cost leadership and cost differentiation theories in supply chain management.
Cost Differentiation in SCM
Jacoby (2010) asserts that the ultimate goal of a successful supply chain management system is to reduce inventory. Cost differentiation aims at reduction of inventory in conjunction with consistency in product availability. Characteristically, cost differentiation aims at developing a unique supply chain management system for an organization, but that which is capable of meeting the desired needs of the value chain without compromising the profitability indices of the organization. In supply chain management, cost differentiation is only applicable in organizations that already command massive competitive advantage and are only geared to achieving uniqueness along their value chain with an aim of meeting long-term organizational goals.
Effective establishment of cost differentiation along a supply chain management details utility of many organizational aspects. Segmentation of the value chain to establish key performance indices before allocation of finances is the first step in cost differentiation along the supply chain. Activity based segmentation is effectively followed by index performance analysis before the organization settles on financial needs of the key indices (Ireland, Hoskisson, & Hitt, 2012). On top of continuous evaluation and monitoring, cost differentiation in SCM is as well linked to the strength of the organization in creativity, invention, and innovation along its value chain. In supply chain management, the theory of cost differentiation can meet its efficacy only if it offers the organization with a detailed segmented report of each key performance indicator along the value chain (Jacoby, 2010).
Cost Leadership in SCM
Definitively, cost leadership details minimization of operational costs to steer organizations into offering products or services at lower prices. As such, cost leadership in supply chain management is a critical concern for operational efficiency. Large organizations may employ cost leadership management when they need to smooth their inconsistent costs. In most occasions, however, smaller organizations with an aim of gaining bigger market shares in short periodic spans employ the cost leadership strategic approach along their value chains. Inventory turnover, operating cash flows mark central considerations in the development of a cost leadership strategy along supply chain management system. Notably, asset bases of organizations contribute to how effectively they utilize cost leadership strategies in their SCM systems. Current organizations with better valuations and favorable market conditions partially employ cost leadership with an aim of reaching to wider operational bases. Further, management along the value chain through vertical and horizontal integration strategies is highly enhanced when cost leadership is applied as a complementary strategy to the course.
Both cost leadership and cost differentiation hold the capability of altering organization’s supply chain management system. The extent to which an organization applies these strategies along its value chain, however, is dependent on the organization’s capital valuation and their projected profitability indices (Ireland, Hoskisson, & Hitt, 2012). Key performance indicators and the organizational portfolio management are some of the factors necessary for consideration while developing either of the strategies along supply chain management systems.
References
Ireland, R. D., Hoskisson, R. E., & Hitt, M. A. (2012). Understanding Business Strategy: Concepts Plus. Mason, OH: Cengage Learning
Jacoby, D. (2010). Guide to Supply Chain Management. London: Profile
