Concentrated Clusters and Supply Chain Management

Concentrated clusters or business agglomeration concept, advantages and disadvantages, and effects on the supply chain
Skyline of Singapore. Concentrated clusters are beneficial to firms and the economy, although these clusters have potential negative effects. (Photo: Public Domain)

Many businesses have mutually beneficial relationships. For instance, a firm benefits from adequate suppliers, while suppliers benefit from the sale of their materials to the firm. Such relationships are optimized when the firms are geographically located near each other. The nearness minimizes costs associated with the flow of people and materials. This is where concentrated clusters are significant. A concentrated cluster, also known as a business cluster or an agglomeration of firms, is the geographic flocking of firms in an area for the purpose of exploiting business opportunities, such as reduced costs in accessing suppliers and business partners. This clustering leads to improved business performance and considerable economic benefits to the area.

Concentrated clusters can enhance the management of supply chains and improve overall firm performance. However, concentrated clusters vary between international firms and domestic firms. Also, managers must recognize the negatives of the concentrated cluster theory.

Concentrated Clusters Enhance Supply Chain Management

Concentrated clusters can enhance the management of supply chains by providing a stable supply base and a network of suppliers that is easy to coordinate, especially when considering that a supply chain can involve various suppliers that the firm would need to coordinate with. Concentrated clusters have long existed in the form of industry associations that require related firms to contribute financially for the development of solutions that can benefit the entire association. Concentrated clusters can also exist in the form of kinship or family-based relations underlying business ownerships. Concentrated clusters can be tightly knit, such that there is a high degree of cooperation among the members of the cluster. There is the ability of clusters to share information with each other, and to provide support for each other towards the growth and development of the member companies.

Because of the ability of concentrated clusters to share information and cooperate at high degrees, concentrated clusters can lead to the development of a virtual support system that can maintain stable supply of products. The cluster itself serves as a buffer to the supply amid changes in demand. Thus, concentrated clusters can enhance supply chain management by providing stability in supply of materials. Such stability minimizes delays in delivery of materials. Corollary to this, the supply chain becomes more efficient, as the firm would experience fewer delays and a better stable flow of materials through the chain. The increased efficiency of the supply chain leads to improved overall firm performance.

The Concentrated Cluster Concept Varies between International and Domestic Firms

The concept of concentrated clusters can vary between international firms and domestic firms in terms of the scope of the operations of the firm, in terms of the fluctuations in supply, and in terms of the actual stability of the concentrated cluster. These considerations are important in analyzing the effect of the concentrated cluster on the performance of the firm. Managers must also consider the possible limitations that these concentrated clusters have according to the legal and regulatory aspect of business.

In terms of the scope of the operations of the firm, an international firm would have a bigger scope than a domestic firm, such that the supply chain of the international firm would be bigger. The bigger scope also means that it would be more difficult to establish a concentrated cluster that can be of significant benefit to the firm, especially when considering that it may be difficult to establish a collaborative network of suppliers in a big scope. Also, the firm may find it beneficial to source certain materials from one place, and another material from another region.

In terms of the fluctuations in supply, the international firm that is able to establish a concentrated cluster can experience less fluctuation in supply, especially if the cluster is based on a group of different countries. A market slowdown in one country would not readily affect the market in the next country. The international firm would experience a more stable concentrated cluster. The small scope of the operations of a domestic firm also translates to a smaller scope of concentrated clusters that it can use. A domestic firm would have a concentrated cluster that can be limited in buffering changes in the market.

The legal and regulatory aspect of doing business can significantly impact the ability of the firm to benefit from a concentrated cluster in its supply chain. The domestic firm tends to be limited in using concentrated clusters overseas, such that the domestic firm experiences fewer barriers to accessing concentrated clusters of suppliers. In terms of the actual stability of the concentrated cluster, the domestic firm may experience better stability in terms of regulatory influences, while the international firm may experience better stability in terms of market influences.

Negatives of Concentrated Clusters

Concentrated clusters create a collaborative system of firms/offices that helps minimize competition. A negative effect of concentrated clusters theory is the potential increase in prices or the increase in the costs of materials that members of the concentrated cluster supply. Concentrated clusters lead to an organization of suppliers that can function as a single entity in market influence. For instance, a concentrated cluster can create its own rules and standards, as well as limits on the changes that these suppliers can make on the prices of their products. In effect, concentrated clusters can function as a price regulating entity, such that they can impose significant pressure or force on the firm. The result is that the firm may have reduced benefit in accessing cheaper materials, as the concentrated cluster can effectively stabilize the prices for all members of the concentrated cluster.

Final Note

Concentrated clusters provide stability of supply and contribute to the efficiency of the supply chain. A concentrated cluster can make it easier for a firm to communicate with its suppliers and can ensure a stable flow of materials though the firm’s supply chain. However, concentrated clusters can function as a means through which the suppliers can make agreements with each other regarding the price of their products, such that the firm can experience less benefit in cost advantages in its supply. When implemented properly and when a balance is created, the firm can benefit from concentrated clusters without compromising much of the cost advantage available in the firm’s supply chain.


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