The vertically integrated supply chain model borne from the manufacturing industries of the 20th century has long been recognized as a creature of very different economic and cultural conditions. In fact, the concept of supply chain management didn’t take hold in the U.S. until the mid-1990s, and logistics wasn’t defined as a profession by the Department of Labor until 2000.
Today, open market conditions, a climate of international free trade, and the ever-evolving integrated global economy offer manufacturers broader access to materials as well as other dynamics of production. Where it used to be more advantageous for a manufacturer to make all facets of production proprietary, today’s climate makes that business model costly, impractical, and inefficient.
Some of the disadvantages inherent in a vertically integrated supply chain are:
- Dilution of core competencies
- Reduced efficiency
- Reduced flexibility due to increased bureaucracy and higher infrastructure investments
- Decreased capacity to support product variety.
In a maneuver to combat such problems of vertical integration, companies have begun reaching out into the global marketplace and spreading their supply chains farther toward outside vendors.
This gradual change, however, has presented its own set of new problems. In an attempt to identify new challenges and impacts on commerce, business consulting firm Deloitte conducted a study across nearly 400 manufacturers to analyze the complexities and challenges of broader, more extended global supply lines. According to Deloitte, the purpose of the study was “…[to] explore the critical trends, challenges, and opportunities for supply chain management today and in the future.”
The two-decade-long Deloitte study identified five major paradoxes brought about by supply chain complexity that manufacturers face. These five paradoxes of complexity can inhibit a corporation’s overall market effectiveness, therefore affecting its bottom line. Recognizing where these pitfalls are and determining how to avoid them can improve and maintain the overall effectiveness and efficiency of operations. As the underlying mechanism of commerce is, indeed, the supply chain, it’s imperative to identify the weak links and adjust the business model accordingly.
Deloitte’s 5 Paradoxes of Complexity
1. The Optimization Paradox — Most manufacturers still optimize locally. Although manufacturing supply chains are becoming increasingly global, they still may not be exploiting the maximum value of their networks. Many optimize locally, by product, function, facility, or geography. Most senior executives understand the concept of directing global supply chain initiatives, but internal changes to support such improvements may face a number of roadblocks. The outlay of capital for additional staff and developing a network outside of a company’s perceived sphere of influence drive many back to the status quo.
What this means, essentially, is that corporations want to provide globally but think locally. Through this “bottom-up” approach, many manufacturers are forgoing optimal efficiency and cost control, which could be realized by a global, or “top-down,” methodology. Looking at business from a broader perspective puts emphasis on the bigger picture and allows a corporation to maximize productivity and efficiency by means of a universal network. The ability to tie functions of the supply chain together in a manner where mechanisms are complementary to one another regardless of geography enables large-scale efficiency.
The Deloitte study notes, “When designing the supply chain from a global view, a manufacturer configures factories, warehouses, engineering activities, transportation routes, marketing, sales, and other operations in a way that maximizes the value of the network as a whole.”
How can the value of the supply network as a whole be integrated to achieve this broader goal? Can a production facility be organized to serve multiple markets? How can transportation lines be woven together to minimize redundancy and waste?
Through vision, communication, planning, and customer relationship management, the issue of aspiring globally yet operating locally may be overcome. These adjustments could have a big impact on supply chain cost structure.
2. The Customer Collaboration Paradox — Few manufacturers collaborate closely with customers. While most manufacturers claim to place a high value on customer service, no more than 8 percent reported collaborating with clients on important issues. Points of mutual concern include strategic planning, inventory management, and cost reduction.
Companies are much more likely to drive engagement with suppliers than with customers. Deloitte describes this phenomenon as “…manufacturers looking backward (to collaborate with suppliers) rather than forward (to collaborate with customers).” An efficient supply chain works in two directions from raw materials to finished products. By considering your customer’s supply chain in production planning, you’ll improve the efficiency of your operation while adding value to the product as a whole.
3. The Innovation Paradox — Few manufacturers are preparing their supply chains for faster new product introduction. Manufacturers believe that product innovation and speed-to-market are main drivers of revenue growth, but both are low priorities on their supply chain agendas.
The global spread of supply chains places increased pressure on these capabilities. Perhaps the reason that many organizations have not implemented supply chain techniques and upgrades that yield accelerated innovation is tight reserves of working capital in today’s economy. Dollars and cents must be allocated and spent with utmost effectiveness.
What are the main obstacles in the way of accelerating product development, and how should manufacturers approach the problem? How does a supply chain impact the output of the operation as a whole? How can management software tools alleviate pressure on bringing concepts and products to market?
In the long run, investments in the supply chain should ultimately outpace the financial implications arising from the initial outlay of capital. Keeping the supply chain astride with conditions maximizes profit and minimizes downside capture. Maintaining a high level of innovation and sensitivity to market trends and consumer demands will increase long-term survivability and profitability.
4. The Flexibility Paradox — Flexibility is being sacrificed in the drive to cut costs. The ability to keep supply and demand in balance by quickly integrating changes to sourcing, manufacturing, and distribution is one of the central goals of implementing a global supply chain. Being nimble in a constantly evolving environment is the key to survival in today’s manufacturing world, and the inability to adjust quickly is a path to becoming obsolete.
Nevertheless, manufacturers are more likely to decentralize supply chain activities in order to realize direct cost reductions, sacrificing speed and flexibility. Few have adequately synchronized the flow of supply and demand. While the trimming-down of internal production operations may be an effective way to remain financially svelte, the paradox of being tethered to another entity over which a manufacturer has no control could actually drive costs up.
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How quickly and efficiently can a manufacturer adjust to the fluid global marketplace? The biggest inhibitors of flexibility are errors in demand forecasts, long supplier lead times, and product proliferation. Failure to optimize real-time forecast and inventory data puts pressure on planning, operating platforms, and logistics. As flexibility and profitability are inherently tied together, finding ways to read feedback and utilize information, remain malleable, and keep stagnation at bay allow firms to overcome this paradox.
5. The Risk Paradox — Risk of supply chain failures keeps growing. Moving and outsourcing supply chain functions is a requirement of adopting a global supply chain, yet these very activities sharply raise the risk of supply chain disruptions. Failing to meet demand, a lack of service quality, and reduction of timely innovation are killers in manufacturing.
These fatal flaws are just as dangerous as the failure to deliver products in a timely manner or the inability to stand behind that product. Deloitte identifies the total quality imperative of today’s markets as less of a focus on the product itself and more of a pre- and post-sales effort.
Relocating production or support facilities far away in an effort to increase cost effectiveness often results in the inadvertent drop in quality along with an actual increase in intrinsic costs. The increase in the length of the supply chain not only may increase production and logistics costs but also allow for a wider margin of error in general — unforeseen risks that develop as a result of less control of the overall process and threaten margins of profitability and odds of success.
Maintaining a high level of quality in not only the product itself but in the method of production, and the relationship with the customer, are ways to counterpoise the increased risk extended supply chains pose to manufacturing. Being cognizant of where the balance between risk and reward lies on the production curve of the modern supply chain is crucial for ideal profitability and sustainability.
The Future of Supply Chain Management
A report by McKinsey & Company looked into complex supply chains in the future. Its main finding was that today’s complexity will give way to a smaller and diverse supply chains.
The report notes, “Against this backdrop, a few pioneering supply chain organizations are preparing themselves in two ways. First, they are ‘splintering’ their traditional supply chains into smaller, nimbler ones better prepared to manage higher levels of complexity. Second, they are treating their supply chains as hedges against uncertainty by reconfiguring their manufacturing footprints to weather a range of potential outcomes. A look at how the leaders are preparing today offers insights for other companies hoping to get more from their supply chains in the years to come.”
The report went further, in discussing this splintering of traditional supply chains with the following: “In such a world (of uncertainty and complexity), the idea that companies can optimize their supply chains once — and for all circumstances and customers — is a fantasy. Recognizing this, a few forward-looking companies are preparing in two ways. First, they are splintering their traditional monolithic supply chains into smaller and more flexible ones. While these new supply chains may rely on the same assets and network resources as the old, they use information very differently — helping companies to embrace complexity while better serving customers.
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“Second, leading companies treat their supply chains as dynamic hedges against uncertainty by actively and regularly examining — even reconfiguring — their broader supply networks with an eye toward economic conditions five or 10 years ahead. In doing so, these companies are building diverse and more resilient portfolios of supply chain assets that will be better suited to thrive in a more uncertain world.”
In the foreseeable future, global supply chain management will continue to be a complex although necessary discipline for corporations. Manufacturers will continue to generate and adopt best practices that will offer some measure of standardization. Minimizing costs and inefficiency, reducing waste and redundancy, and remaining flexible in adapting to market conditions are the impetus behind the shift away from the vertically integrated supply chain.
To help make the venture as successful as possible, foresight and vision by management is imperative. Technological innovations that integrate supply chain management with other functions, both internal and external, should simplify and facilitate interactions between supply chain partners. In the meantime, manufacturers must more fully embrace the role of supply chain management within their own organizations and insist that business partners share that commitment. This approach should lead to the successful merger of today’s global economy and endeavors to maximize productivity and profitability.
However, as is generally known from supply chain management in the production supply chain: One partner can only be as good as the other partner in the chain. Mismatches borne from opportunistic behavior or the expectation that “plug and play” with new suppliers will just work without proper management will quickly lead to a lack of success. This means that even the best-laid plans may go to waste if all members of any given supply chain in any manufacturing industry don’t recognize the same set of imperatives and collectively place high importance on working together to achieve success in the marketplace.
Top photo credit: tungphoto at FreeDigitalPhotos.net
Joshua Kahn is executive vice president of Perfection Spring & Stamping Corp., a manufacturer of custom metal stampings, four-slide parts, springs, wireforms, and mechanical assemblies for global markets. Based in Mount Prospect, Ill., the company serves the hardware, medical, consumer electronics, electrical, appliance, and automotive markets. It provides engineered solutions and metal products and assemblies to meet demanding applications.