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COVID-19: Lessons on Supply Chain and Distribution

September 27th, 2020
Manufacturing & Supply Chain

COVID-19: Lessons on Supply Chain and Distribution

September 27th, 2020
Manufacturing & Supply Chain

The COVID-19 pandemic has hit global trade and investment at an unprecedented speed and scale. Multinational companies faced an initial supply shock, then a demand shock as more and more countries ordered people to stay at home. The urgent need to design smarter, stronger, and more diverse supply chains has been one of the main lessons of this crisis. Here we want to discuss the global supply chain and the lessons that we get from this pandemic.

Global supply chain

Supply chains that stretch over different countries on different continents are one of the defining characteristics of globalization. At its core, global supply chain management comprises logistics, purchasing (sourcing), operations, and marketing channels. From a strategic point of view, supply chain management involves, among others, key decisions on where to locate these activities.

According to Hult and his coauthors, on average 20 % of a global firm’s performance can be attributed to where it locates its value-added activities. Building relationships along both directions of the supply chain to bring goods or services to customers is a vital component of global strategy. Upstream suppliers typically provide raw materials; downstream partners create links to the final consumer and thus have an important boundary spanning function. Marketing strategy traditionally focuses more on the downstream side of the supply chain, i.e. on marketing channels. In the literature, the terms marketing channels, market channels, and distribution channels are largely used interchangeably. But whatever the term used, all the activities of the downstream supply chain ultimately aim to provide place utility and time utility.

Marketers use these terms to emphasize that the right product or service needs to be in the right place at the right time. More specifically, a product will provide customer value and satisfaction only if it is available to the customer when and where it is needed, and in the appropriate quantity. Very few companies can deliver such place and time utility independently; usually, they need to rely on intermediaries. Intermediaries as well as proprietary entities involved in distribution aim to ensure an orderly flow of material, personnel, and information throughout the distribution channel. Thus, actors in distribution channels also perform the important role of matching supply and demand through their interactions with suppliers, manufacturers, and end customers.

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We start the discussion by briefly illustrating the key benefits global supply chain management can offer. This is followed by a look at the main factors that drive inbound and outbound sourcing and logistics decisions. Next, we focus on the design and management of global marketing channels. The chapter ends by identifying some important trends in international supply chains and distribution channels.

In essence, a company needs to decide how intensely it wants to cover a given market. Three main alternatives arise intensive, exclusive, and selective distribution.

Intensive distribution

Is about placing a product in as many outlets as possible and is most commonly used for goods that are impulse purchases or which consumers are unlikely to look for. Convenience products like bread or milk come to mind. In such cases, brand loyalty is likely to be low and consumers are prepared to buy the nearest substitute product instead of going to another distributor.

Exclusive distribution

Is the opposite of intensive distribution; a producer implements a strategy of restricting the number of intermediaries that are allowed to stock a particular product. This type of distribution strategy is usually employed in situations where customers are willing to travel to obtain a product and where high levels of customer service have to be guaranteed. For example, high prestige fashion apparel producers like Gucci or Chanel adopt this type of market coverage.

Selective distribution

Lies somewhat between the two aforementioned strategies since some, but not all, available outlets are used. Companies attempt to balance a wider reach with a lower cost than that of intensive distribution. Specialty goods like home appliances or furniture are products usually associated with this strategy.

What should a company do with its supply chain in the COVID-19 pandemic?

Many companies, though, do not have a detailed understanding of their supply chain, either in terms of the steps involved to get a product to its final destination, or where their supply chain originates. It can be expensive and labor-intensive work, and many companies just haven’t taken the time or spent the money to figure out all of the details. As a result, they might have expected a problem when certain elements of the supply chain shut down, but they might not have had a clear idea of when those problems would arise. (Was it a site in China, for example, that would have been shut down when that country started to go into lockdown due to the coronavirus? Or was it somewhere along the shipping line? Or did the problems not occur until the United States started shutting down its businesses?) Even if they can’t map their supply chain information, many companies are capable of assessing their inventory. That data can give an organization an idea of what they can go ahead with while they try to figure out how much of a disruption they are facing and where they can try to make up for that gap.

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