Clusters and Supply Chain Management
The paper provides a discussion of Porters Cluster Theory and how it provides competitive advantage to groups of industries that are engaged in a similar or related trade in a certain geographic zone. The paper uses this theory to further discuss the case study of the Amish people and the furniture industry that they have set up in the plains of US.
How does a concentrated cluster enhance the supply chain management and therefore improve the firm performance?
Porter (1998) defined clusters as “groups of interconnected firms, suppliers, related industries and specialized institutions in particular fields that are present in particular locations”. According to the Porter, competitive advantage for a company is produced by the value that a firm is able to create for its buyer and this can be diagnosed through the supply value chain. He has further argued that innovation, improvement and change is critical in forming a competitive advantage by applying better methods to compete in an industry.
Firms that operate in a cluster will manage to gain advantage over the national and international competitors if they can find new and better methods of production, building an economical supply chain, design, linking elements of the value chain and permit knowledge
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Kuah (2002) while prescribing to the Cluster theory points out that the cluster theory is not new and since biblical times, certain regions have carved a name for themselves. Citing examples of the ship building industry of Glasgow to the IT sector of Silicon Valley of US, steel instruments from Sheffield UK, the Indian IT industry and others, the author argues certain regions became famous cluster because of the availability of natural resources or because the climate favored growth of items such as tea, precious metals, crops and so on. But the fact remains that clusters enjoy a tremendous advantage in the form of a pool of skilled personnel, higher influx of technology, scale of economies and when managed properly, clusters do help a particular industry, community or group of people to grow.
With the present concept of global economy, Garelli (1997) suggests that that the ‘economy of globality and proximity would tend to be a major force in a market’. By being global, the production mechanisms can be situated in one continent and the end users in another and with improvements in communications and transportation, the world has become a global village and physical distance is no longer a barrier to international business relations. Multi-national corporations thrive on tapping international resources such as cheaper labor, raw material and location advantage for added competitive advantage. This phenomenon needs to be seen in light with Porters cluster theory and the concept of the cluster would now include production clusters in small towns of India and China that again make use of the cluster relationship to provide products at economical rates.
It can be deducted from the above discussions that the key factors for a cluster to be successful are: enhanced supply chain, disbursing benefits to members in the community and a willingness to adopt new technology and ideas and to firmly believe in innovation. The most important element for a cluster to be successful is a sustainable supply chain.
The Case of the Amish Furniture Industry
Tom (et all, 2006) has used the Porters Cluster Theory to analyze the performance of the Amish Furniture industry. According to the author, the Amish people, who settled in the plains of US have a long history of farming and the related trade. Since a few decades, they have ventured into the manufacture and sales of special fine hand crafted furniture items. According to the author, the Amish furniture industry is concentrated in small clusters of community and is made up of multiple levels. A schematic illustration is provided in below.
Figure 1. Amish Furniture Cluster (Tom, et all, 2006)
As shown in the figure, there are a number if clusters that make up the Amish furniture cluster. The furniture is manufactured by furniture factories and also by small cottage industries and these form one cluster. Other clusters of the supply chain include the raw material suppliers who supply lumber and tools, glue up units, component manufacturers and finishers. This is one side of the supply chain where the actual procurement and manufacture of goods takes place. The other clusters are the transporters who transport the finished products to tourism centers, restaurants, hotels and to non-local furniture retailers. On first glance, there is nothing special about this arrangement. But the success of the Amish Furniture industry lies in the manner in which each cluster communicates and cooperates with each other.
Tom (2006) reports that other than the furniture factories, two or three people run the other enterprises and there is a very high degree of commitment and responsibility among the people. In the supply chain, there would be more than one group of furniture factories, cottage industries, finishers, lumber processing units and so on and these form small clusters of communities of the same profession. Each cluster cooperates with the other, communication lines are open and consequently, the turn around time and time to market is very short. Raw lumber is purchased from large lumber selling companies by the wood mills who anticipate the requirement for lumber against the orders placed by the furniture manufacturers. The wood-processing phase takes a few months since the logs have to be cured. Once the processing is done, the processed lumber is either directly sold to the furniture factories who use their own infrastructure to further process the lumber. Small cottage furniture manufacturers prefer to get it finished by the Finishing Mills. There are also other elements such as the component manufacturers; the glue ups units and other non-Amish hardware suppliers. The furniture manufacturers then prepare the furniture and deliver it to their markets through a network of local transporters and warehouse consolidator.
Tom points out that the Amish furniture cluster is the best example of not only an excellent supply chain but also of lean manufacturing. By operating in dedicated clusters, individual units are more productive. The cluster allows better access to suppliers, information related to business opportunities, complementarities between businesses, access to institutions and public goods, and better motivation and measurement. Since there are specialists in the form of glue up operators, component manufacturers and hardware suppliers, the initial financial outlay of the small Amish cottage industry owner is decreased. He can procure expertise from the supply chain without incurring undue cost. Tom reports, “there are no great fluctuations in demand for labor, as manufacturers are often content to produce just enough to maintain a comfortable living. When faced with increased production demand, firms are faced with three alternatives: work longer hours, hire more labor, or extend lead times. More often than not, manufacturers choose to extend lead times rather than compromising on quality or impinging on time with family”.
According to Tom, personal relationships and community ties foster trust and facilitate the flow of information. An important fact pointed out by Tom is that while pride and the desire to look good in the community drives Amish manufacturers to excel, the motivations for doing so are typically based on a desire to maintain group norms and standing within the community, rather than an overt attempt to outdo a competitor. Members of the Amish furniture cluster have adopted a set of underlying operating principles that are driven by a desire to maintain an individual’s own reputation for fine work rather than downgrading the reputation of competitors. The concept of price cutting or increasing the price to make profits does not exist. Members of the cluster are open to demands from customers to make different products, introduce new designs and there is regular innovation in their work practices. Since glue up and components clusters are nearby, they can be given small trail order that allow new designs to be tried out at minimal costs.
These practices go hand in hand with what Porter has suggested that “in the future, a firms competitive advantage will not be determined chiefly by greater efficiencies in the sourcing of inputs, but rather by the ability of firms to exploit the resources available in the “cluster” or network of local individuals and companies, in which they operate”.
Drawbacks of the Cluster Theory
Desrochers (et all, 2004) has pointed out some drawbacks for the Cluster theory. According to the author, such clusters perform very well when the economy is fine, but they can quickly break up with any changes or downturn in the economy. If any one link fails, then the whole supply chain would collapse. In the Amish industry for example, if the local lumber producer fell for some reason, then the furniture manufacturers would not have the required contacts or the means to procure the items in sufficient volumes themselves. Suppose a drought broke out in the region, then the local buyers would disappear and there would not be sufficient customers. The authors also point out that being a closed community; entry barriers are very high for non-Amish manufacturers who would wish to set up units in the areas.
The paper has examined Porters Cluster theory and how it has been applied by the Amish Furniture industry. The Amish community has created a number of clusters that include wood processing units, wood finishing companies, glue up and component manufacturers. The actual furniture manufacturers, buy the items from these units and manufacture the items and sell them in the local market. The cluster operates with high efficiency, quick communication and reduced inventory. At the same time, the paper ha pointed out a number of drawbacks that the cluster can face in the form of falling prey to economic downturns and high entry barriers for non-Amish manufactures.
Desrochers Pierre. Sautet Frédéric. June 2004. Cluster-Based Economic Strategy, Facilitation Policy and the Market Process. Journal of the Review of Austrian Economics. Volume 17. Issue 2-3. pp: 233-245
Garelli, S. (1997), The four fundamental forces of competitiveness, The world competitiveness yearbook 1997, 17th edition, Switzerland: IMD.
Kuah Adrian T.H. 2002. Cluster Theory and Practice: Advantages for the Small Business Locating in a Vibrant Cluster. Journal of Research in Marketing and Entrepreneurship. Volume Four. Issue 3. pp: 206-228
Porter, M.E. November-December 1998. Clusters and the new economics of competition. Harvard Business Review. Volume 33. Issue 1. pp: 77-90
Tom DeWitt, Larry C. Giunipero, Horace L. Melton. 2006. Clusters and supply chain management: the Amish experience. International Journal of Physical Distribution & Logistics Management. Volume 36. Issue 4. pp: 289-308