Firms need to focus on maximizing value in their supply chain-series of interrelated activities to move a product or service from its originating point to the customer. It is the linkages involved in delivering a product or service most productively for the customer and the business. It is vital to operations management and crucial to deliver consistent, high-quality products on-time to customers, and to create value for the business.
Each Link Delivers Value for the Customer
The chain’s activities range from accessing raw materials or sub components, to delivering the final product or service to the customer. Walmart is a wholesaler and retailer in a large supply chain. The more parties involved, the greater the probability of issues:
raw materials' manufacturers > components' manufacturers >
manufacturing and assembly plant > wholesalers > retailers
Wherever you sit in the chain you will depend on someone to deliver your part or product at a particular time. PrimeTime Co Ltd, (Prime), a component manufacturer in an automobile industry supply chain, sat in the middle. Management agreed a contract with assembly plant, AutoCo, to produce and deliver 100 units daily. Prime’s contract included a penalty clause for missed delivery. Units had to be delivered by 4:00 PM daily or Prime would pay AutoCo the cost of downtime waiting for Prime’s shipment-downtime computed based on a particular formula including AutoCo’s overhead costs.
Prime provided AutoCo with two names to call anytime about any production and quality issue, including increased production and rescheduling delivery. By agreement, AutoCo had its own quality specialist on site at Prime when Prime manufactured the part for AutoCo. That specialist had final approval on the acceptable quality of that item. This worked well because of the excellent transparent relationship between both companies.
AutoCo gave Prime a tentative delivery schedule each month. By 6:00 AM each day, Prime accessed AutoCo’s ordering system to see actual requirements for the day. The system required precision, and Prime monitored it hourly. Prime saw this as a huge challenge so management provided needed resources and careful attention to the people and process. The system has worked well for several years with a 99% compliance.
Answers three questions at the outset: What to outsource, to whom, and when? Next, ensure the chain has at least these four features:
Needed Partner Traits
- Highly visible links understood by each participant: The system is as good as the weakest link. You might be the wholesaler, but you must become comfortable with each segment and understand probable risks of failure in different links. In some businesses, this risk is more critical than others. Delays might be too costly to customers to capture significant outsourcing benefits.
- Collaboration to deliver acceptable results throughout: Collaborating isn’t easy. One essential issue is the alignment of incentives. Prime had a huge incentive to deliver on time because of the high cost of AutoCo’s downtime. The ideal model for successful collaboration is benefit-sharing with partners. Collaboration becomes even more complicated when different countries, cultures, time zones, and other differences exist. Nevertheless, cooperation is crucial.
- Customer-demand focus instead of production-demand through the chain: The lead company (Walmart, or AutoCo) needs to keep partners aware of customers’ needs and encourage them to add value to the finished product. This awareness can improve competitiveness of the entire chain and provide additional benefits to each participant.
- Transparent and helpful communication throughout the chain: Communication keeps members abreast of developments impacting their contributions to the chain. Besides, meaningful communication allows members to respond quickly to opportunities and challenges.
Disruption Risks Could Negate Benefits
In the late 1990s, I became Vice President Marketing for the Bauxite, Alumina, and Specialty Chemicals of my former employer Alcan Inc. (now part of Rio Tinto), and explored outsourcing parts of our supply chain. However, the potential disruption risks were too high, so we did not proceed. This decision produced a crucial lesson: sometimes, we must ignore significant outsourcing benefits because the low probability of disruption could be devastating to the overall system.