3.6 Interfaces in the supply network
Managing the internal interfaces is part of the story. Of increasing importance is the management of the processes that cross organisational boundaries between suppliers and purchasers, that is, the management of the supply network or chain. This network of suppliers, customers, government agencies and others that are necessary parts of the entire value system must be proactively managed. This includes designing the network appropriately.
A supply network is defined as:
an interconnection of organisations which relate to each other through upstream and downstream linkages between the different processes and activities that produce value in the form of products and services to the ultimate consumer.
(Christopher, quoted in Slack and Lewis, 2002, p. 181)
A generic supply network is shown in Figure 11; note the very large numbers of individual buyer–supplier relationships represented.
Supply networks come in different shapes and sizes. At one extreme is the vertically integrated organisation that does everything itself from extraction of raw materials through to delivering finished products to the end consumer. An example is an oil company: it extracts the raw material from the earth, processes it in various stages and also runs the outlets that provide fuels to the end consumer. At the other end of the spectrum are virtual organisations. Such companies perform very few operations themselves – they ‘merely’ co-ordinate the activities of many other organisations to meet the needs of customers. Box 3 describes the operations of Dell, which shows some virtual company characteristics.
Box 3: Dell
It has become a famous story. Michael Dell, a biology student at the University of Texas at Austin, had a side-line in buying up unused stock of PCs from local dealers, adding components, and re-selling the now higher-specification machines to local businesses. The side-line grew to over $50,000 per month. He quit university and founded a computer company which was to revolutionise the industry's supply network management. Entering the personal computer market in 1984, Dell realised that there was little point in trying to develop all the components for his computer himself. It was too expensive and too cumbersome a business. Better to make good contacts with specialist component manufacturers and take the best of what was available in the market. Dell says that his commitment to outsourcing was always done for the most positive of reasons. ‘Outsourcing, at least in the IT world, is almost always a way to get rid of a problem a company hasn't been able to solve itself … that's not what we're doing at all. We focus on how we can coordinate our activities to create the most value for our customers.’ While Dell insist that their suppliers maintain a quality, price, and innovation edge, they do see them as partners …, a point emphasised by Michael Dell: ‘When we launch a new product, their engineers are stationed right in our plants. If a customer calls up with a problem, we'll stop shipping product while they fix design flaws in real time.’ With a neat symmetry, the technology that Dell produces has enhanced the economic incentive to collaborate with suppliers. They can share design and performance databases with suppliers, enabling them to shorten product development times.
In Dell's early days this kind of thinking was revolutionary in the computer industry. But Dell also applied it to the demand side of their business. Seeking ways to undercut their rivals, Dell started to sell its computers direct to customers, bypassing retailers. This allowed the company to cut the retailer's (often considerable) margin, which in turn allowed Dell to offer lower prices. However the move was controversial. Computers are complex purchases, it was argued, customers need to have their hands held while they are making up their minds, they won't buy a product they can't see and touch. Time, though, was on Dell's side. Corporate customers (Dell's main market) were becoming more sophisticated and needed less of the type of support that compensated for their own lack of product familiarity. Even domestic consumers needed less hand holding. But cutting out the link in the supply network between them and the customer also had two other huge benefits. First, it offered an opportunity for Dell to get to know their customers' needs far more intimately. At the simplest level, this allows them to forecast based on the thousands of customer contact calls they receive every hour. In a longer-term sense, it allows them to talk with customers about what they really want from their machines. In this way design decisions are made in an environment of realistic customer awareness. The second advantage of Dell's direct sales model is that it cuts the time taken for components to move from suppliers through the supply chain to the end customer; this reduced Dell's level of inventory to under 10 days' worth, as opposed to over 80 days for some competitors. Preventing its computers from languishing on shelves waiting to be sold is particularly important when 80 per cent of the cost of the computer is in its components, and those components are falling in price by around 30 per cent a year. In effect, the product is perishable. Its value is deteriorating over time. But because Dell is shifting its computers through the supply chain faster than its rivals, less value is lost. This gives Dell a significant cost advantage. In 1996, when the price of memory chips (about 20 per cent of a PC's cost) dropped by three-quarters, Dell is reckoned to have achieved almost a 10 per cent cost saving.
Identify one benefit and one drawback of the following features of the Dell approach to supply chain management:
the use of extensive outsourcing
selling direct to the end user.
|Benefits||Reduces requirement for investment in capital plant; Existing manufacturers have competences it would be difficult to match||Cuts out retailer's margin; Feedback direct from the customer is available; Cuts time to move goods through the supply chain|
|Drawbacks||Management effort overhead; Less control than would be the case with in-house facilities/expertise||Not all customers may be comfortable with this mode of purchase|
One of the key management implications of seeing the enterprise in terms of the wider supply network it inhabits is the focus on the design of inter-organisational rather than internal processes. This is often known as supply chain integration. There are three aspects to this (Lee, 2000):
Information integration – the exchange of information and knowledge between partners concerning, for example, inventory status, demand forecasts, production schedules, promotion plans.
Co-ordination – delegation of activities and decisions to the best-placed supply chain member; so replenishment of stocks of a component might become the task of the supplier making that component rather than the supplier of the finished product, for example.
Organisational linkage – shared performance measures, effective communications channels, alignment of incentives, and equitable sharing of the gains and the risks from supply chain integration.
For each of the three dimensions of supply chain integration, give one example that is evident in the Dell example.
Information integration: shared design and performance databases.
Co-ordination: fixing of design flaws by suppliers as soon as they become apparent.
Organisational linkage: the use of a shared performance database implies at least some sharing of performance measures; supplier personnel working within Dell's premises provides good communication.
The strategic management of supply networks is concerned with shaping them – deciding what activities should be undertaken by the enterprise itself and what should be undertaken by other organisations, and then forming and managing the relationships with the other parties in the network, upstream and downstream. Networks are in effect organised collections of buyer–supplier relationships. Supply network management is therefore heavily concerned with relationship management.