In the past, organisations attempted to extend their control by ‘hard wiring’ key suppliers into vertically integrated supply chains. Using the full capability of e-business there is now the potential to revolutionise the way supply chains are configured and managed. The new paradigm is one of ‘virtual’ supply chains made up of loose affiliations of companies, organised as a supply network, where physical assets are replaced by information. However, to make the new paradigm work, information must flow seamlessly within and across the organisations that make up the virtual supply chain. Even with the phenomenal growth in e-business there remain barriers, both internal and external, to implementing these information flows.
Vertical integration is history, the future will be about virtual organisations operating within virtual supply chains.
In all sectors e-business is increasing the pressure for supply chain responsiveness. Many of the pressures that organisations currently face can be grouped into a general category of ‘increased demands and more of them’:
- ever more demanding customer requirements – not only concerned with reduced costs and shorter lead times, but also increasingly focused on requirements for product and service offerings tailored to an individual customer’s requirements
- ever increasing competition – not only because of easier market entry, enabling new entrants to steal significant market share at the expense of unresponsive existing suppliers, but also because e-business now gives opportunities for customers and suppliers to bypass traditional supply chain structures
- ever increasing volumes and velocity of information – the requirement to gather, process and act on massively increasing volumes of information in a rapid and intelligent manner.
To remain in the chain, companies do not just have to demonstrate the physical value they add, but also that they add value through their ability to manage their own suppliers. They need to exploit the new channels and leverage increased geographic access better than their existing competition and the new market entrants. The key to success is about efficient management not only of the physical flows but also the information flows. In the past, organisations attempted to extend their control by ‘hard wiring’ key suppliers into vertically integrated supply chains. Using the full capability of e-business there is now the potential to revolutionise the way supply chains are configured and managed. The new paradigm is one of ‘virtual’ supply chains made up of loose affiliations of companies, organised as a supply network, where physical assets are replaced by information.
An example of this paradigm shift is what has happened in the automotive sector. Henry Ford’s original vision included controlling as many aspects of the end vehicle production as possible; from the production of raw materials in steel mills and rubber plantations, through all of the design, manufacturing, assembly and distribution activities. A truly vertically integrated supply chain.
Today the vision for most automotive vehicle manufacturers is to become virtual companies, owning only the brand and the customer. The design, system development, product sourcing, logistics, and even final assembly can all be outsourced to supply chain partners. Increasingly the goal is to replace physical assets with information in such a way that every member of this extended supply chain benefits. This forces the move from an environment of ‘hard wired integration’, where relationships are arms-length and adversarial, even across functional boundaries within the organisation, to an environment based on ‘negotiated sourcing’, where non-core activities are outsourced and collaborative partnerships are the norm
(see Figure 1 below).
Figure 1
This is a compelling vision, which is fast becoming a reality for many companies. The realisation of the vision of the virtual company, working within a virtual supply chain, is simultaneously enabled and driven by the phenomenal growth in e-business capability.
Probably the most quoted example of the virtual company is Dell Computer Corporation. When the Harvard Business Review asked Michael Dell about the challenges of leadership in a virtually integrated organisation his response was: "The whole idea behind virtual integration is that it lets you meet customers’ needs faster and more efficiently than any other model. With vertical integration, you can be an efficient producer – as long as the world isn’t changing very much. But virtual integration lets you be efficient and responsive to change at the same time".
When asked for his views, Kevin Rollins, vice chairman of Dell Computer Corporation, said: "Most of the managerial challenges at Dell Computer have to do with what we call velocity – speeding the pace of every element of our business. Managing velocity is about managing information – using a constant flow of information to drive operating practices, from the performance measures we track, to how we work with our suppliers".
Timely and accurate information, available to all organisations within the supply chain, makes possible the virtual vision. However, most organisations currently exist as islands of information. More often than not, information is used as a tactical competitive weapon against suppliers, with the result that the whole supply chain operates at a sub-optimal level of efficiency. What is needed is both the strategic recognition of the importance of collaboration across organisational boundaries, and the ability to seamlessly deliver to anyone, on any IT platform, timely and accurate information in order to be able to optimise supply chain efficiency.
Internal barriers to information flows are often the hardest to break down, but external barriers are also a challenge
In a recent Forrester Research survey, when asked the question "Which group presents your greatest supply chain collaboration challenge?" 58% of 500 top US companies identified ‘internal groups’.
Despite all the work on business process re-engineering during the last ten years, most companies continue to be organised in functional silos. It is still all too common for functions to be measured against a set of stand-alone performance metrics that encourage adversarial behaviour across the internal functional boundaries. In multi-site manufacturing organisations, the problem of internal adversarial behaviour is exacerbated by the continuation of the use of ‘site profitability’ as a key performance measure. The site manager is encouraged to be a mini-entrepreneur with the potential to boost his site’s profitability to the possible detriment of the organisation as a whole.
The first challenge is to overcome the internal cultural barriers to information flows. In order to achieve this it is necessary to align the internal functions (and factions) and ensure that they are working to, and measured against, a congruent set of supply chain objectives. Unfortunately, 54% of 500 top US companies also said that the poor state of their current systems and data was one of their biggest obstacles to achieving their supply chain goals (see Figure 2 above). This means that, even if they want to manage their operations as an end-to end supply chain, many organisations have systems that provide only a partial view (see Figure 2).
Figure 2
Thus, even if the will exists to break down internal cultural barriers, technical barriers to information flows remain a critical internal challenge for most manufacturers. The majority of multi-site manufacturing operations maintain a mix of platform environments and both package and legacy applications. Many also operate embedded process control applications that are incapable of integration with higher level transactional processing systems. This means that potentially critical information about the manufacturing process is lost, as there is no easy way to correlate data from, for example, process control diagnostics with product quality or customer returns information held on other systems.
Open system, client/server architectures and packaged enterprise applications have given manufacturers glimpses of the benefits of true enterprise integration. However, for most organisations timely and accurate internal information flows still remain an unrealised vision.
When dealing with customers and suppliers, organisations traditionally exchange information through a variety of informal and formal methods; from casual telephone conversations through structured electronic file transfers. Until recently there was no such thing as a common transactional environment for managing the supply chain, or working in collaboration with suppliers to co-ordinate Just-In-Time, line-side deliveries. The internal issues about adversarial relationships and incompatible IT systems are potentially multiplied a thousand fold once an organisation attempts to work as part of an extended supply chain.
The Internet – the ultimate virtual supply chain panacea?
Within the past five years the Internet and the Worldwide Web have provided a new universal architecture that simplifies the distribution of information between trading partners. The Internet has provided the universal pipeline for distributing information anywhere. The Worldwide Web has provided a new universal browser that allows information to be displayed on any client platform. The Internet and the web, enabled by global standards for protocols and application development languages, have delivered the type of universal deployment activities that can now make the virtual supply chain a reality.
Already many organisations have moved rapidly beyond first generation ‘informational’ and ‘interactional’ web applications and are now already implementing ‘transactional’ applications (see Figure 3).
Figure 3
Whilst most of the transactional web applications are currently concerned with relatively simple business applications, more complex, mission critical business applications will soon follow. Manufacturers will be able to share information with customers and suppliers without having to embark on expensive systems integration projects to accommodate users from organisations with different technical and applications environments. The ultimate fruition of Internet applications will be in supporting the collaborative optimisation of the virtual supply chain.
The challenge
The speed with which e-business has now become a startling reality means that businesses do not really have the option to ‘do-nothing’. The adoption of the virtual supply chain concept and development of Internet enabled integration capabilities are essential components of the evolution to the virtual manufacturing supply chain. The key challenge for most businesses is how best to embrace the opportunities of external integration and collaboration from a starting position of first having to overcome internal barriers, both cultural and technical.
It is imperative that a total supply chain perspective is adopted in order to identify the implications of e-business on the strategic position of the company and its competitors. This assessment must look wider than traditional competitors. Possible threats from new entrants and from existing suppliers, who could go direct to end customers, also need to be taken into account. It is important to realise that your organisation is a part of someone else’s supply chain and therefore potentially under threat of disintermediation.
At the same time, you must work on breaking down the internal barriers, implementing processes, measures of performance and systems that will enable the benefits of external integration to be fully realised.
The more rapidly businesses develop their internal supply chain, e-business readiness and identify what part they wish to play in the extended supply chain networks, the lower the inherent business risk. With the power of e-business the rules of competition have changed; it is no longer the big that will eat the small, it is the fast that will eat the slow. Speed is of the essence.
For more information on the supply chain and procurement challenges facing industries in the e-world, please click here.
