It is the last topic in Unit 1, and it pulls in ideas from 1.2, especially competitive advantage.
The key ideas
Artisan versus mass production
A production process is the method a business uses to make and deliver its product. Artisan processes rely on skilled labor and close attention to detail, usually in smaller quantities. Mass production relies on technology, assembly lines, and machinery to make a larger quantity.
Businesses choose based on customer priorities such as quality, price, and customization, along with their own core competencies and what competitors are doing. Match the details in the scenario. Do not guess from company size.
A workshop that builds ten custom guitars a month by hand is using artisan production. Ford's moving assembly line, which turned out Model T cars at a pace no craft shop could match, is the classic case of mass production.
The supply chain for a good
A supply chain links the individuals and businesses at each stage of getting a product to the final customer. It can be local, regional, or global. For a physical good, raw materials and component parts are acquired and transported, a manufacturing facility makes the finished good, the good may sit in a warehouse, and then it moves through a distribution center or retail store to the customer.
A chocolate bar starts with cocoa beans grown on farms and shipped to a factory. The factory makes the bars, a warehouse stores them, a distribution center sends pallets to grocery stores, and a shopper picks one up at the checkout aisle.
The supply chain for a service
A service has a supply chain too. The business acquires the employees, resources, and delivery systems it needs, then provides the service in person or virtually. There is usually no factory or warehouse in the picture.
An online tutoring company hires tutors, licenses video call software, and delivers sessions through an app. A hair salon hires stylists, rents a space, and buys products, and customers come in person.
Choosing suppliers and managing risk
When choosing a supplier, businesses weigh cost, quality, efficiency, convenience, and risk.
Five common supply chain risks are storms and other disasters, unstable governments, shortages, factory mistakes, and a supplier with a bad name. Any of them can delay delivery or raise costs, which threatens a business's competitive advantage and profit. On the exam, name the risk category, then name the consequence.
In 2021 a worldwide shortage of computer chips forced car companies to slow production, which is a resource shortage. A hurricane that closes a port is a natural disaster. A supplier in a country that suddenly restricts exports is a political instability risk.
How strategy shapes the supply chain
A business chasing a low price usually uses mass production and builds a supply chain around cheaper resources and efficient processes. Some also scale their operations, building a larger or more efficient supply chain so revenue grows by more than costs do.
A business chasing high quality builds a supply chain around high-quality resources and methods, using either artisan or mass production.
A business chasing barriers to entry builds exclusive or restrictive agreements, such as preventing a supplier from selling to rivals or a retailer from carrying competing products.
A premium coffee brand signs a contract that stops one farm cooperative from selling its beans to any other chain. Rivals cannot get those beans, which builds a barrier to entry through the supply chain.
Key terms
- Production process
- the method a business uses to produce and distribute its goods and/or services.
- Artisan production
- a process that requires skilled labor and close attention to detail, typically in smaller quantities.
- Mass production
- a process that typically uses technology, assembly lines, and machinery to make a larger quantity of goods.
- Supply chain
- the individuals and businesses linked at each stage of getting a good or service to the final customer.
- Raw materials and component parts
- the basic inputs and pieces, such as computer chips, a business acquires before manufacturing.
- Warehouse
- a storage facility that holds finished goods before distribution.
- Distribution center
- a facility that routes finished goods to retail stores or directly to customers.
- Supply chain risk
- the chance that something outside a business's direct control disrupts its supply chain, delaying delivery or raising cost.
- Scaling operations
- building a larger or more efficient supply chain so revenue grows by more than costs.
- Exclusive agreement
- a contract that restricts a supplier or distributor from working with a business's competitors.