Definition of supply chain distance

Supply chain distance refers to the geographical, cultural and organisational distance between supply chain partners.  This is an important for firms to consider as it can have an impact on its performance and the ability to serve its customers. 

First, geographical distance is the physical separation between the organisation and its suppliers. For example, companies with suppliers located in different countries tend to have a large geographical distance between each other.  

Second, cultural distance reflects the differences between the cultures of the societies in which the company and its suppliers are located.  Cultural distance influences how managers confront new or challenging problems and develop working relationships. Discussions about expectations and future plans are easier to facilitate when an organisation and its suppliers are based in societies with similar cultures.

Finally, organisational distance is the total number of companies that are in the supply chain, and this increases as the number of firms in the supply chain increase.  Potential problems can arise as communication is conducted between lots of parties and important information may get “lost in translation.” This means some companies establish formal codes of conduct that lay out specific expectations and set basic standards that suppliers have to adhere to.

A company in Europe might source from either Brazil or Thailand, both roughly equivalent in geographic distance, but are very different culturally. So, the company would have to put practices in place to help avoid potential misunderstandings and ensure that suppliers function in a way that the firm is used to from its operations in Europe.

One thing to consider is the cultural expectations in the sourcing country, which may not be well understood by suppliers outside the market. If the company is located in a developed country and sources from developing countries, the sourcing country must conform to cultural expectations (and regulations) of the developed country. For instance, child labour is not used in developed countries, and thus would expect that suppliers in the developing country not to use child labor.

When sourcing from countries that are distant both geographically and culturally, some companies have opened “purchasing” offices in China to help them deal with their Chinese suppliers. A purchasing office is set up by a company in the supplier country to identify suppliers and work directly with them.

By having its own employees in the country and without the need to rely on contractors or outside intermediaries, the company will be able to explain better their needs and requirements to their suppliers, but also keep tighter control on their suppliers’ actions. It also reduces the number of firms in the supply chain as the firm sources directly from China rather than dealing with a third party. [1]

Example

In 2010, efforts by the US to force China to allow the renminbi to appreciate could be bad news for European companies buying Chinese goods. A more stronger renminbi makes goods purchased from China more expensive.

As if this were not enough to contend with, inflation in China’s labour market has returned in 2010 after an absence of about three years. Strikes, in that year, over pay underlined the demand for higher wages, which can be one of the biggest costs of manufacturing.

Retailers in particular, in an effort to manage the inflation in the supply chain, are moving to cheaper Asian locations. But sourcing from less developed markets exposes companies to another set of risks. These range from managing quality to ensuring the supply chain is free from child labour.

Primark, the European retail group, whose supply chain has come under scrutiny, is taking a number of steps to improve its ethical sourcing. These include audits of its overseas suppliers, which look at areas such as health and safety, that workers are of a legal age and that they are being paid an adequate wage.

It is also working with non-governmental organisations in the countries where its garments are made, and increasing its own staff there. [2]

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Supply chain: Distance can add danger as well as value


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