The Three levels of act in the Supply Chain

• Single Activities:
  • Cost Drivern or
  • Value Driven;
• Link Between Activities
• System of Activities > Vertical Integration.

1.Single activities, The Competitive Advantage:

-> The Competitive Advantage of the single activity depends on:

• Cost Differentials (cost competitive advantage);
• Value Differentials;

Steps to identify cost competitive advantage:

1. Identifying:
   1. Significant activities in terms of high incidence on total cost;
   2. Causes of cost and opportunities for real improvement;
   3. Competitors‘ different behaviors in performing the given activity;
2. 2° Step:

-> Evaluation and quantification of costs of specific activities considered as significat;

-> Benchmarking with costs covered by major competitors in carrying out the same activities.

3. IDENTFYING SPECIFIC COST DRIVERS: factors explaining the origins of costs; 

1.1)Single activities, COST DRIVEN:

-> DEF: causes behind primary and support activities’ cost differentials.

-> MAIN:

• Level of saturation of product capacity;
• Target capacity;
• Scale economies;
• Experience and Learning Economies;

Level of Saturation of product capacity:

-> DEF:  Technolgoy and organizational configuration of the company impact on the costs.

• These are used to plan, develop and coordinate those activites needed to put products on the market.

-> Short term impact, concernes already functionning companies;

Target Capacity:

-> DEF: yearly output capacity enabling the company to use production factors in the most efficient way possible.

=> If production level is stet at target capacity =>

• Production capacity is saturated;
• Average cost per unit is minimum;

UNDERSATURATION:	OVERSATURATION:
Higher fixed cost on average; Higher cost per unit.	Higher cost for assets; Higher average cost for unit.
CAUSE: -> Overstimatinon of market demand; -> Deliberate strategic choice to create surplus resources;	CAUSE: -> Understimation of market demand; -> Need to face contingent events;

Scale Economies:

-> DEF: the same volume can be scaled

-> IDEA: scale and cost per unit are inversely related.

-> Scale determined by non.linear events:

• Standardizaition;
• Specialization of labor;
• Critical Mass;

📌 Combined effects:

• Scale Economies (Long Term);
• Saturation of Production Capacity (hort Term);

Experience and Learning Economies:

-> DEF: average cost per unit drop when cumulative volumes increase.

• Synergistic effect;
• Improve efficient thanks to:
  • Comprehension
  • Repetition and
  • Rationalization

-> First Mover can be an advantage: accumulated more time;

-> DETERMINATED by:

• Irreversibility;
• Timing
• 🔺Share the experience can boost experience economies;
• 🔻Weak in changes or radical innovations introduced by competitors.
• Localization of activities;
• Institutional factors.

1. Localization of Activities:

-> If is strategically relevant => becomes

• Significal source of cost competitive advantage;
• A barrier to new entrance;

-> Preferential access to distribution channels determine outbound logistic costs of competitors;

1. Institutional Factors:

-> Some industry are regulated by PA;

-> They (Public insittution) can establish regulation, duties and incentives/Disincentives;

-> Lobbying or Advocacy can be a barrier;

1.2)Single activities, VALUE DRIVEN:

-> VC is the instrument for SBU to have a competitive advantage and create more margin.

• EFFICIENCY: Cost reduction;
• EFFECTIVENESS: creation of value for custumers;

Steps to identify Value competitive advantage:

1. Identifying Value-Significant Activities;
2. Evaluating and quantifying their value contribution;
3. Benchmarking with value created by major competitors’ activities;
4. Identifying specific value drivers;

-> we can improve effectiveness by increasing value drivers/Value differentials

2.Link between activities:

-> Value and costs can be impacted by internal links (Raw materials, relationship between company and suppliers, in-house or in-field control);

-> New management techniques introduce new internal link, as lean manufacturing, JIT and concurrent engineering.

3.System of Activities, Vertical Integration:

-> In the third level of analysis we decide to put in outsourcing or not part of the production.

VERTICAL INTEGRATION: company internalizing and therefore integrating some activities;

FULL VERTICAL INTEGRATION: all activities are performed internally.

=> Hierarchy system;

HOLLOW CORPORATION: all activities are outsourced (excluding coordination and financial control);

=> Turning to the external markets;

TRANSACTION COSTS: costs to bear in order to set up a commmercial transaction with a third party

✔ADVANTAGES of MAKE-OPTION:

• Eliminate costs for scouting, evaluation, selection of suppliers, adminstration, legal costs, potential logistics costs;
• Internalization of supplier’s margin;
• Increasing control on activities’ control;
• 🔺 Control and develop of potential core resources and skills;
• 🔻 Reliance on the supplier;

❌DISAVANTAGES of MAKE-OPTION:

1. 🔻 Efficiency compared to external supplier (scale economies, experience economies);
2. 🔺 Investment in fixed capital (for long term assets);

-> Buy option is a way to turn fixed costs into variable costs;

5. 🔺 Hierarchical coordination costs;
6. 🔻 Motivation for human resources in non-core activities;
7. 🔻 Incentives to efficiency and effectiveness in captive market;