One of the industry associations GXS has been working with recently is the Global Supply Chain Forum sponsored by Stanford University.  The forum is comprised of representatives from many of the world’s largest manufacturing companies as well as some of Stanford’s leading faculty such as supply chain thought leader Dr. Hau Lee.  Dr. Lee has introduced a number of revolutionary ideas over the past few years, but there is one particular insight that stands out in my mind:

“Instead of company to company competition, we are now in an era of supply chain to supply chain competition.”

This is a concept that I think becomes more and more critical every day that goes by.  To illustrate my point, let us examine the high tech industry as an example.   More specifically, consider the sub-sector of high tech that manufactures computers and related peripherals.  This is a relatively young sector that was first started back in the 1960s and 1970s.  However, during its short history the supply chain model has undergone a radical transformation. 

Mainframe Value Chain 

When the first mainframes were introduced a single vendor often functioned as the sole source for all computing needs.  OEMs such as IBM and Honeywell manufactured not only the finished mainframe product, but most of the components as well including the memory, storage (DASD) and processors.  The operating system, database and even some applications were developed by the same vendor who manufactured the hardware.  If the mainframe broke or needed an upgrade, the hardware OEM provided the repair and service. 

2008 PC Value Chain 

Contrast the mainframe model to the complex, multi-tiered value chain in today’s computer industry.  I work on an “IBM Thinkpad.”  However, while the logo on my laptop says IBM, the manufacturer of the machine is actually a Chinese company – Lenovo.  Although Lenovo is the OEM, it only contributes a small fraction of the content of the laptop.  The components inside the laptop are sourced from third party suppliers (Kingston for memory; Seagate for storage; Intel for microprocessors).  Also noteworthy is the fact that Lenovo does not typically sell the machine directly to end users.  My laptop was purchased through our company’s preferred distributor – CDW.  The software on the machine is made by another group of specialized companies.  Microsoft publishes the Windows operating system and Office application suite.  Other software vendors such as Adobe, Symantec and Apple provide other applications such as document viewing, desktop security and digital music.  And when my laptop breaks, who do I call?  Not Lenovo, but a 3^rd party such as a high tech distributor, 3^rd party logistics provider or a contract manufacturer for warranty support and repair. 

 

The point here is that the computer industry has migrated from a vertically integrated model to a highly specialized, heavily outsourced model.  This type of highly outsourced model in which OEMs outsource much of the manufacturing and supply chain management to suppliers is growing more common in all discrete manufacturing sectors.  Examples can be found not only in high tech, but also aerospace, automotive, consumer products and industrial equipment.

Supply Chain versus Supply Chain 

The key take-away from the discussion above is that OEM manufacturers are increasingly dependent upon a community of outsourcing partners to achieve success.  Factors that can go wrong (and do go wrong) are, in many cases, completely out of the control of the OEM.  In these new value chain models, companies are actually not competing with other companies, but instead their supply chains are competing with other supply chains.  This crucial concept, first introduced by Dr. Lee, is critical for channel masters in today’s supply chain to understand.  However, while it may seem obvious, the majority of today’s leading retailers and manufacturers continue to structure models that prioritize the near-term financial performance of their own company above the overall long-term competitiveness of their supply chains.  The term “partner” continues to be utilized ever more frequently to describe suppliers in a value chain.  However, the approach of most channel masters remains more adversarial than collaborative.   The largest exception is, of course, the Japanese manufacturing community which has structured itself around kereitsu relationships between OEMs and key suppliers. 

Consider the following “company centric” paradigms that are becoming more commonplace in today’s supply chains.

• Performance Scorecards and Penalties – Retailers and manufacturing OEMs have instituted elaborate chargeback mechanisms that penalize suppliers for problems arising during routine order fulfillment.   Not only are these penalties designed with the goal of optimizing the buyer’s business processes, but each retailer and manufacturer has different measurement criteria.  As a result, suppliers are forced to comply with terms such as delivering during tightly monitored 2-hour receiving windows and labeling of pallets with customer-specific serialized barcodes and text.  While these processes simplify receiving for the buyer, they add cost and complexity for the supplier and friction to the overall relationship.
• Open Account – Large buyers are moving from their traditional letter of credit processes with overseas suppliers towards open account models.  The goal of the migration is to reduce banking fees for the buyer, but in many cases the side-effects to suppliers are significant.  Without a bank-guaranteed letter of credit to use as collateral for short term financing, suppliers struggle to fund raw materials purchases, manufacturing plant payrolls and other operating expenses.
• Extended Payment Terms - In an effort to hold on to cash longer, buyers are extending payment terms with suppliers to periods of 60 or 90 days.   Extended terms create a cash flow issue for suppliers who must now seek out short term loans to fund their operations.  For smaller suppliers with lower credit ratings, these expensive short term loans compromise profit margins and increase the overall cost of goods sold.
• Vendor Managed Inventory – More and more customers are looking for their suppliers (or a 3^rd party) to hold title for inventory until the point of consumption or sale to the end-customer.    Buyers prefer these types of models as they shift the inventory carrying costs to the supplier’s balance sheet along with the risk of product obsolescence and retail shrinkage.  For high volume channels, large suppliers can benefit from the added demand visibility and end-customer insights available through a VMI program.  However, for many buyer-supplier relationships the risks and costs are heavily unbalanced in favor of the customer.

What do suppliers as valued partners in the relationship receive in exchange for these terms?  Buyers will offer appealing terms to suppliers willing to engage in customer centric business processes:

• Greater share of a customer’s wallet as the supplier becomes the preferred vendor for a particular product line
  Broader scope of services that may include many value added services that increase the average revenue per unit sold

Suppliers must weigh the pros and cons of such arrangements to determine their best strategy.  Often the tradeoff is a choice between revenues and profitability. 

What are the EDInomics of supply chain to supply chain competition?   B2B integration technology can be the key to unlocking the potential of collaborative relationships in a value chain.  B2B can be used to enable a variety of strategies such as multi-echelon demand visibility, collaborative product development and third party supply chain finance.   But the technology is rendered ineffective unless the channel master in a relationship has a long-term, supply-chain wide perspective on their activities.   Unhealthy suppliers introduce performance drag, cost overhead and higher risks to the overall supply chain.  While these factors may not be visible in the buyer’s next quarterly income statement, they will most certainly define the long term success of the buyer.  After all, as Dr. Lee states “The weakest link in the supply chain defines the supply chain.”

Steve Keifer

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