Question

GLOBAL MACROTRENDS AND THEIR IMPACT ON SUPPLY CHAIN MANAGEMENT

Ch. 10 Mitigating Supply-Driven Imbalance

Using an allocation approach, how should a firm decide how to ration quantities of valuable resources? What different factors should go into that decision?

Answer 1

Allocation is one of the resource employment approaches. This approach is used by firms when they realize that they have access to valuable resources that are locally present and these resources are not globally available. The firms decide how to ration quantities of valuable resources based on the marginal opportunity costs of the resource unavailable in future. It is not a wise decision for the company to use all of the scarce and valuable resources without knowing what the future costs would be. Additionally, commodity and any future markets evasion drives firms to gain this competitive advantage. A classic example is Southwest Airlines has been wise by obtaining large quantities of fuel and oil when it was foreseen that the prices would increase in future. This is a hedging strategy. Southwest Airlines was able to gain a profits when other airlines suffered greatly from the rising oil prices and its volatile market. This strategy helped SouthWest Airlines to gain competitive advantage and properly ration the fuel and oil prices by obtaining them at the least price and maintain stable operational cost eventually enabling the ticket prices down. Thus, Southwest was able to be profitable than their competitors and create value for their customers. Thus, firms use the allocation approach by identifying the valuable scarce resources and predicting its future demand. Then, they are bought in bulk anticipating future increase in price and demand.

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