Value-Added Functions and Differentiation of Supply
The purpose of supply chains is to add value to production
and distribution. Depending upon the markets and the value
chains they are servicing, supply chains can be differentiated
according to criteria such as costs, time reliability and risk. Efficient logistics contributes to added-value in four major interrelated
A variety of factors are jointly shaping the configuration of
- Production costs. Derived from the improved efficiency of manufacturing
with appropriate shipment size, packaging and inventory levels.
Thus, logistics contributes to the reduction of production costs
by streamlining the supply chain.
- Location. Logistics adds value by taking better advantage of
implying access to expanded markets (more customers) and lower distribution costs.
- Time. Added value derived from having goods and services available
when required along the supply chain (e.g. lower lead times) with better inventory and transportation
- Control. Added value derived from controlling most, if not all, the
stages along the supply chain, from production to distribution.
By better synchronizing cycles and lead times, logistics enables better marketing and demand response, thus anticipating
flows and allocating distribution resources accordingly.
- Logistics costs. Considers the full array
of costs to make products available to the final consumer,
namely transport, warehousing and transshipment. Supply chain
managers are particularly sensitive to the stability of the cost
structure (consistent costs) implying that routes having cost
fluctuations may be discarded in favor to routes of a higher
cost, but with less volatility. Costs are therefore a standard
criteria where the cheapest routing option is sought, as long as
the cost structure remains stable as supply chains are unlikely
to be modified if a cost advantage is only temporary. The
concept of cost is relative since its importance is in relation
to the value of the cargo being carried. Cost considerations
tend to concern more containerized goods that have a low value,
such as commodities (e.g. paper) than high value goods (e.g.
- Transit time. A factor that is increasingly
being considered since it strongly influence inventory carrying
costs and inventory cycle time in supply chain management. So,
for cargo that has a higher value (clothing) or is perishable
(reefers) the routing option that is the fastest and/or shortest
will be preferred.
- Reliability. Relates to a factor that is
mitigated by contemporary supply chain management practices. For
several supply chains, time can be a secondary factor as long as
shipments arrive at the distribution center within an expected
time frame. If shipments are regular and that this reliability
remains consistent, it is possible to organize supply chains
accordingly by having more inventory in transit.
- Supply chain risk. Relates to a factor that
is generally imponderable and generally involving the level of
confidence that the shipment will reach its final destination
within expected costs, time and reliability considerations. In
some cases, risk can also involve potential cargo damage or
risks routes are obviously preferred over higher risk routes.