Using Supply Chain Management to Manipulate Demand
Supply Chain Management is much more than the process of product production. It is a complex chain of activities that creates a viable end product that is economically profitable for the firm. Of course this point is best articulated in Michael Porter’s Value Chain Framework noted previously in our discussion of the global value chain. For discussion sake let’s re-examine the diamond supply chain from the perspective of Porter’s Value Chain.

In our previousValueChain2.png discussion, we pointed out that significant value was added to the diamond in the marketing and sales activity sector. But, the diamond supply chain is an old and tightly controlled supply chain. Is value only added in the retail phase? The answer is a resounding no. Think in terms of the oil market. Oil prices are heavily driven by demand. This is also true of diamonds. One of the key selling points is that a diamond is for special occasions (like an engagement) and a luxury item. In order for this to hold true, the demand and supply of diamonds must be tightly controlled.

The De Beers firm is a key architect in crafting a supply chain in which diamond inventory was manipulated for purposes adding value. In Porter’s Value Chain Framework, inbound logistics includes among other things receiving, storing, and inventory control. De Beers strategized that by stockpiling rough diamonds (those retrieved primarily from African and Australian mines controlled by De Beers) they would control supply. This strategy was successful for many years and created an unbelievable competitive advantage for firms such as De Beers. It was only in the mid-nineties, when De Beers lost key mining contracts that this “storing” strategy began to lose ground. Prior to the nineties, this hoarding of rough diamonds had a major impact on competitors who had to deal with the controlled supply of unfinished diamonds. It also created an environment in which stakeholders were shielded from major decreases in diamond prices because of the limited supply. Banks and investors benefited as well as the major diamond producing firms.

In broader terms of supply chain management, the supply control of diamonds is significant because it illustrates the ways in which large gains in value can be maximized throughout the supply chain not just at key points. While the Tiffany brand and retail outlets add substantial value, value is also derived at the front end through the control of supply. A firm should not rely one primary activity to create competitive advantage it should exploit all opportunities to maximize profits.

Be Wary of New Competition - Supply Control Post 1990
Even a supply chain as old and refined as the diamond supply chain should be watchful of new entrants in the market and subtle changes that pose competitive threats. After the nineties, there has been slow and steady shift in the diamond pipeline. Unlike other industries we cannot point the finger at globalization as the cause of this shift. In recent professional conferences regarding the diamond supply chain, it has become apparent that there are new players that are here to stay. De Beers failed to re-negotiate exclusive mining contracts with mine owners in Australia which has opened the door for newcomers to utilize these suppliers. Diamond mines have also gone into production in Russia and Canada. This has also impacted De Beers ability to tightly control the supply of diamonds. On the finishing end, India is rapidly expanding its diamond finishing industry and is also posing a threat to more established firms. How has De Beers and other major diamond firms responded (Tiffany’s included)? Through more aggressive branding and retail efforts, diamonds are now marked not just for purposes of distinguishing them from “conflict diamonds” but also in an effort to further leverage branding as a value producing activity. This means that a Tiffany diamond is more than that blue box it also contains an etching that further marks the diamond as a “Tiffany diamond.”