By Stephen Rogers & Robert Porter Lynch.
For many manufacturers, the supply chain — including both owner production assets and supplier and distribution partner assets — is by far the largest asset it ‘owns,’ and is core to the company’s ability to succeed both financially and in the marketplace. And while the supply chain is a major strategic asset, it is seldom seen or managed as one.
Instead, supply chains are often managed as expendable or easily replaceable. Management assumes it will always be there, even when abused. This belief is not only flawed, but also subjects companies to needless organizational risk.
To manage the supply chain as a strategic asset, it is important to step back and consider what it is comprised of. Unlike traditional assets, which a company fully owns, the supply chain is both a direct and an indirect asset, much broader and more complex than just its internal component. Let’s examine its parts:
The value chain is an end to end, or E2E, entity. To be managed as a strategic asset, all three parts of the chain need to be considered: Upstream (suppliers), internal (owned production assets and human assets that operate them), and downstream (customer and distribution channels). At each layer, there is a unique set of supplier, internal, and customer relationships.
The key is prioritizing efforts depending on the business situation and avoiding the temptation to forget its broader E2E span. Managing one part of a strategic asset independently from another will lead to dysfunction between tiers and parts of the chain; thus, in a crisis, each company’s traditional management focuses on protecting its own internal assets, mercilessly cutting upstream costs, and praying for downstream relief.
It is much more beneficial for upstream and owned parts of the chain to collaborate, coordinate, and integrate to deliver lower cost for both suppliers and owners by eliminating waste and making downstream volume more profitable.
The E2E value chain has a different ownership structure than other assets. Companies neither directly ‘own’ nor ‘control’ their value chains — suppliers own their part, customers own their part, and the company owns its part.
That requires decision processes to mirror that complexity. Companies want to do business with each other, yet rarely get to completely control each other. Hence, there is a strong need for collaboration, coordination, and synchronization between decision spaces, with efforts to formalize those decisions to offset suspicions or clarify expectations (such as labor agreements, purchase and sales contracts, delivery standards, long-term service and support, etc.). Influence and alignment becomes far more important than command and control; and historical track record breeds either trust or distrust, which, in turn, drives the level of legal wrangling. This is why the best practices of strategic alliances are vital to success.
Conduit of value flow
Supply chains are not just product flows; they are far more complex. Think, instead, of a supply chain as an asset containing five kinds of capital that establish value flows: Physical/product; financial; human; intellectual; and, social capital.
The real power of the value chain is maximized when all five of these value flows are synchronized, aligned, and harmonized, much like a well-tuned engine. Take one of these five out of the ‘value engine,’ and poor performance is inevitable. At the same time, for parts of the chain that are non-strategic but need to operate to maintain the business, managing the flows can also be flexible, handling those that add little differentiation without as much fine-tuning.
Only if all your competitors are performing poorly or tactically will you not recognize the flaws. But, if one competitor gets it right (both the engine tuning and the strategic-versus-tactical balance), your competitive advantage can suffer.
The strategic battle of value chains
The best companies have learned that their ability to create strategic competitive advantage is not totally in their control. A company is only as good as the sum of what it does itself, plus the quality and value of its ‘inputs’ from its entire value chain. Here’s a perfect example that demonstrates this principle:
Because 70-80 per cent of their cars were made by their suppliers, when Toyota then Honda entered the North American marketplace 30 years ago, they brought their value chain strategy with them. To outsource such a heavy proportion of their cars to suppliers meant more than just quality and cost control — it meant creating and maximizing value at every segment of the value chain.
While quality was paramount, the Japanese OEMs emphasized a collaborative, high-trust, high-performance relationship throughout their entire value chain. They saw both suppliers and dealers as part of their team — strategic partners. Customer satisfaction, speed of delivery, integration and reduction of parts, reduction of total cost in the chain, reduction of non-value-added work, lowering warranty costs, lean principles, reliability, increased flow of innovation, and mutual profitability were core objectives. Suppliers were expected to be more profitable, and to invest a portion of those profits into advanced technologies for their OEM partner to use exclusively for a period of time.
Toyota and Honda saw their suppliers and dealers as alliance partners, not vendors and peddlers to be manipulated and squeezed, unlike their rivals. In fact, when suppliers got into trouble, they sent their own experts to work side-by-side in the supplier plants to solve the problems. The value chain concept extended from supplier to their auto dealers and finally to highly-valued customer relationships formed with the consumer. Customer satisfaction was the ultimate test of the value chain strategy.
By the late 1990s, the result was crystal clear — Toyota and Honda were beating Detroit’s ‘big three’ with better quality, lower costs, higher profits, and growing market share. By 2000, while GM’s warranty costs were exceeding their profits, Toyota was taking over as the world’s largest auto company. It took another decade, after bankruptcies, and numerous crises before Detroit started to understand what their more collaborative rivals were thinking.
Strategic portfolio management
A strategic portfolio is a competitive array of the supply system, identifying key competencies needed in the value chain. Strategic value chain leadership (SVCL) aims at ensuring your company is highly selective in choosing the best deliverers of value.
Strategic portfolio management is essential to accomplish several objectives:
• See the value chain holistically as an entire flow of value that creates competitive advantage;
• Define what value truly means to suppliers (do not confuse value with cost — and note that real or total cost is not just acquisition cost, but also factors in operational and disposal costs); and
• Assess how good your value chain is in flowing value, by analyzing supplier responsiveness, reliability, innovation, integration, and synergy.
The bottom line
The supply chain is a strategic asset that is huge and complex — extending from suppliers to customers, across multiple tiers, across industries horizontally and vertically, with multiple owners made up of people and organizations often driven by different goals and competitive strategies.
When thinking strategically, it’s critical to understand how to produce E2E value, especially if you are a major player in the value chain.
The discipline of supply chain management is not a spectator sport. It requires a team on the playing field with and end-to-end vision, a strategic view of how competitive advantage is created, the ability to create collaborative alliances among suppliers, and excellent execution. It needs proactive leadership and the willingness to advance into new territory.
Stephen Rogers and Robert Porter Lynch co-authored a series of white papers for the Supply Chain Management Association of Alberta (SCMA Alberta). This column has been further edited by SCMA Alberta CEO Janice Isberg for the use of Prairie Manufacturer Magazine.