Delivering superior customer service in a world of uncertainty requires a responsive, agile supply chain that can adapt quickly to changes in market conditions, and whose span of control extends beyond the four walls of the factory deep into the supply base.
Greater transparency in supply chain operations and more collaboration are becoming crucial for success. Web-based tools are facilitating the flexibility and extended reach necessary to allow organisations both to view deep into the supply chain to see how their suppliers are performing and to re-configure their supply chain as circumstances demand.
The opportunity to improve supply chain performance by sharing information has long been acknowledged. Much of the focus thus far has been on exchanging inventory and product movement data throughout the supply chain. More recently, companies have found that sharing information relating to market intelligence and promotional plans can dramatically improve forecasting, thus smoothing the replenishment process.
Now the reach of the supply chain is extending. The mentality and behaviour that underpinned the old ‘fortress supply chain’ approach is a thing of the past as partnering and collaboration, enabled by information sharing, become the fundamentals of a high performance supply chain.
Companies have adopted vertical integration as a way of controlling flow, efficiently co-ordinating the use of resources and assets and managing end-to-end costs. Whilst this is appropriate in a stable environment, the volatility experienced by most companies renders vertical integration ineffective.
Successful companies recognise that building a rigid, inflexible infrastructure in a world that is characterised by change and uncertainty is risky - it might be efficient, but it won’t be responsive. Fundamental changes are occurring in the way companies interact with their suppliers and in the way in which customer requirements are fulfilled.
To meet the need for high levels of co-ordinating without the risk of owning a substantial fixed assets base and having to manage a diverse range of processes and capabilities, companies are now moving away from vertical integration to virtual integration.
Such pioneers sit at the heart of a network of partnerships using internet-based technologies to ‘blur’ many of the traditional organisational boundaries and barriers to information flow. They are managing information rather than assets. The ability to communicate at speed, coupled with the application of lean principles, is enabling companies to realise the benefits of vertical integration without the risk of investing in substantial fixed assets. The rewards are reduced inventory levels and obsolescence costs, which in some instances allow organisations to move away from holding stock of finished products towards configuring or making-to-order.
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. The result was 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 between different internal functions, to an environment based on ‘negotiated sourcing’, where non-core activities are outsourced and collaborative partnerships are the norm.
One of the first signs of this has been the development of B2B exchanges in which groups of manufacturers create an electronic hub linking suppliers and buyers.
A virtual supply chain needs to be able to support both ‘arms length’ relationships and collaborative partnerships. The choice of which to adopt is not a function of technology, but rather good supply chain management. Similarly, it does not follow that customers or suppliers tout for business based on the lowest price - any organisation that sees moving to a virtual supply chain as a way of abdicating responsibility for costs and problems is naïve at best.
A virtual supply chain exploits technology to allow an organisation to connect, align ways of working and transact for an optimum period. Relationships are not exclusively transactional, nor are virtual supply chains at odds with long term strategic relationships. On the contrary, the technology which underpins a virtual supply chain also underpins integrated product development, collaborative forecasting and synchronised flow.
This may seem more like wishful thinking than commercial reality, but companies such as Dell have shown that such an approach can work. As Michael Dell explained in an interview with the Harvard Business Review: ‘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."
