Simplifying supply chain relationships

Today's Business News - Wednesday December 12, 2007

THE WEEK IN REVIEW

Simplifying supply chain relationships

CHRIS CATTO-SMITH

Most organisations exist within a complex relationship of vendors, suppliers, customers, distributors, and business partners. Understanding and leveraging these supply chain relationships are key success factors in navigating an increasingly interconnected world.

Many companies have tried to leverage supply chain relationships via industry consortiums and emerging internet technology, but these solutions have collectively fallen short of their goal because most supply chain relationships are ill-defined and lack a co-ordinating governance structure. As we have previously discussed, trust is a critical factor for supply chain success particularly in Asia.

Upstream and downstream opportunities: Suppliers, business partners, and customers come in many shapes and forms. Many times, institutions underestimate the importance of suppliers to the viability of their enterprise. Understanding who composes your supply chain is an essential first step in understanding how to leverage it. The following describes eight key supply chain categories, which cover both upstream and downstream opportunities.

Upstream opportunities include:

- Raw materials: Includes steel, lumber, fuel, and other materials needed to build a product or maintain a work environment.

- Components: Includes prepossessed items needed to make products that are then sold to your customers. These can range from springs to computer chips.

- Products: Differs from components in that they are procured for use by a company or consumer and not resold.

- Services: Includes maintenance, banking, insurance, health care, legal, association, and many other service categories needed to run a business.

- Infrastructure: Includes emergency and other government services, electricity, water, natural gas, and communications capabilities.

- Data or information: Includes any data or information, obtained in paper, electronic data interchange (EDI), or other format, from a third party.

Most enterprises rely on raw materials, products, services, infrastructure offerings, and data during a given business cycle. Companies that manufacture or assemble products also rely on component parts.

Downstream opportunities deal with relationships with distributors and customers:

- Distributors: Includes agents, resellers, franchises, wholesalers, retailers, or other distributors of your products or services.

- Customers: Includes buyers or users of your products and services. (Some institutions call their customers subscribers, constituents, clients, or patients).

Often many companies have little knowledge of the entities leading into and out of their respective supply chains. This not only limits their ability to assess how an industry may evolve, but it limits understanding of when this evolution will occur.

Unseen linkages: These complexities are magnified when thousands of entities lie up and down a supply chain. One company may supply a component, which is then sold to a third party, embedded in another product, and ultimately sold back to the originating company. Ending a relationship with a company can cut off your own supplier. Companies are concurrently cooperating and competing as suppliers, business partners, competitors, and customers - all in the same supply chain.

Impact of a weak link: When a link in the supply chain fails unpredictably, numerous entities can suffer. Major damage can result when one company's problem shuts down an entire portion of a supply chain that lacks an industry-wide contingency plan. When two companies in Boeing's supply chain failed to deliver component parts in 1997, it cost Boeing $1.6 billion. The costs to other companies within the supply chain were never released. Obviously, effective supply chain management, including the creation of industry-wide contingency plans, is not a luxury.

Supply chain dominance: One approach to supply chain management is coercion by large companies that dominate the chain. This has worked in limited fashion in the technology and retail sectors - at least for the companies with the clout to impose their view on those below. However, few companies have the market penetration to order a supply chain to bow down to their whims. And other companies in the supply chain derive little value from a top-down, command-and-control structure imposed upon them.

Maintaining a holistic view: Now companies are pursuing internet-based solutions that claim to manage supply chains through e-business, but these initiatives rely on the same old paradigm in which a company views itself as the centre of the supply chain. Within this model, decisions are made with a skewed view of supply chain relationships. What is needed instead is a holistic view of a supply chain that will enable the creation of holistic, integrated business solutions.

In summary: Developing this view of supply chains requires governance structures that supersede the myopic view of any one company trying to assess a seemingly endless number of relationships, while driving their own costs ever lower. Next week we will discuss the governance structures that are necessary to ensure supply chain participants can benefit themselves and their respective industry sectors in a sustainable manner.

Weekly Link is co-ordinated by Barry Elliott and Chris Catto-Smith CMC of the Institute of Management Consultants Thailand. It is intended to be an interactive forum for industry professionals; we welcome all input, questions, feedback and news at: BElliott@OliverWight-AP.com, cattoc@cmcthailand.org

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