Linked companies in a particular field may exist in the same geographical region in order to enhance competition and other advantages gained with inter-linkage. According to Porter (qt. in Giunipero & Melton, 2006), companies related by technology, common inputs, skills, and those that manufacture complementary products may exist in a cluster. Companies operating in clusters have various advantages amongst them because they can build trust, coordination, innovation, improved production, and boost competition amongst themselves. Firstly, firms that operate in the cluster may end up building long-term relationships as they become involved in the processes concerned with the flow of products and services from the source to the end-user. Because they can coordinate in the supply chain and its management, they end up benefiting through cost efficiencies. Working together in the same geographical location may spur and drive innovation as well as stimulate competition. The idea of competitive advantage as a benefit to firms that are in a cluster network in the supply chain management has been explored by Porter (1998; qt. in Giunipero & Melton, 2006). This raises concern over the companies’ aggressive moves for globalization and outreach to other localities because it proposes that companies could be losing much.
According to the Supply Management Theory, active management of inter-firm processes and relationships leads to improved performance for individual firms and the overall supply chain. One of the greatest direct benefits that accrue to a firm in a clustered relationship with others is the shortening of the supply chain (Mentzer et al., 2001; qtd. in Giunipero & Melton, 2006). This shortening translates to quicker deliveries, cheaper transportation costs, and cheaper costs of communication among other benefits. Because some companies count on inputs to produce goods, the interlinked clustered companies may source the raw materials quickly or the related production services, leading to quicker production. Another opportunity presented by clustered firms is access to quicker markets within closer proximity. This can be seen as an advantage because companies that are located far away need also to transport physical raw materials that are important in the production process. The transportation issues shorten also the time needed for the completion of production way from the bringing of raw materials.
When businesses are interlinked together, there are realized efficiencies in production processes and low prices for the final products. This makes the customer benefit whereas the companies gather competitive advantage because of the cheap commodities on offer at the marketplace. Customers can achieve value and satisfaction. Firms are also able to reduce the total costs in participating in the whole process in an integrated manner. Moreover, interdependence seeks to enhance lower conflict, greater trust, and commitment (Kumar et al., 1995; qtd. in Giunipero & Melton, 2006). The companies can access and measure supply chain partners in an attempt to improve the quality of the raw materials and services they source from them because they are in closer proximity. In this respect, customer satisfaction may be achieved with the improvement of the quality through the cooperation between the suppliers and the producers. Companies can develop cooperation in respect to information of business they are engaging in. clusters produce a kind of interdependence that may pull other benefits to the companies such as access to public goods because the localization appears as areas of interest for particular economic and social matters. Social public goods such as specialized infrastructure which may improve the company’s productivity may also come up as benefits when the localized cluster attracts the government’s desire to improve them. Cluster operation provides an opportunity for companies to develop the knowledge and experience in the business they are engaging in because they can quickly and in unity identify the gaps in the processes and systems. The companies can gain advantages of shorter feedback loops and this enhances the development of new business opportunities.
According to Mentzer et al. (2001) supply chain management involves companies engaging in activities such as cooperation, information sharing, sharing of risks, and having the same goals and maintaining relationships, and these activities may bring about or improve the “coordinated flow of materials from source to end customer, and ultimately build customer value” ( qt. in Giunipero & Melton, 2006).
According to Porter, cluster business may stimulate the formation of new businesses which enhances the expansion of the cluster itself. This, together with the possibility of a cluster to drive the pace and the direction of innovation, and the increased productivity for the inter-linked firms make businesses compete for more.
The operating costs of the firms that participate in the linkage can enjoy better access to employees and suppliers who are experienced. The advantage of accessing experienced employees is that the company may reduce the recruitment costs according to Porter (1998; qt. in Giunipero & Melton, 2006). Members have preferred access to specialized information as observed by Porter. This competitive, technical, and extensive market “information accumulates within a cluster” of the business firms, according to the aforementioned author. The drawbacks include a lack of advantages that accrue from the dispersion of the company or the outreach to other locations. Companies may not be able to enjoy benefits such as cheaper labor elsewhere, greater customer outreach because of presence in global aspects, and the ability to compete for more globally with companies that are placed elsewhere locally and do not have a global representation.
In addition, the current trend in the development of technology and informational systems favors e-commerce and therefore the advantages of localized presence have been greatly eroded.
References and Biography
Dewitt Tom, Giunipero Larry & Melton Horace. (2006). Clusters and supply chain management: the Amish experience. Web.
Kumar, N., Scheer, L.K. and Steenkamp, J.E.M. (1995). The effects of perceived interdependence on dealer attitudes. Journal of Marketing Research. Vol. 32, pp. 348-56
Mentzer, J.T., DeWitt, W., Keebler, J.S., Nix, N.W., Smith, C.D. and Zacharia, Z.G. (2001). Defining supply chain management. Journal of Business Logistics, Vol. 22 No. 2, pp. 1-25
Porter, M.E. (1998). Clusters and the new economics of competition. Harvard Business Review. pp. 77-90